It’s 2010, the commercial real estate recession is raging, and, more than ever, the industry has become a real-life Monopoly game. In the United States, $500 billion of debt will come due annually in the next three years due to the fallout of the commercial mortgage-backed securities market. If a property changed hands this decade, CMBS debt most likely was involved, so the repercussions in a down economy are widespread.
Enter the so-called special servicers—workout specialists such as Berkadia Commercial Mortgage LLC—which have been around for years but are now more prominent than ever.
Unless you’re a survivor of the 1980s real estate crash here, you’ve probably never been face-to-face with a special servicer. And if you’re merely a tenant in a building, you’re probably wondering what all the fuss is about. It’s important for you to know, though, that a landlord’s financial health can have a trickle-down effect on tenant-improvement packages, brokers’ commissions—and possibly your lease—if your building goes into special servicing or, in the worst-case scenario, foreclosure.
In layman’s terms, special servicers provide cures for nonperforming securitized mortgages and oversee foreclosures. Their job is to collect, restructure, settle, or get title to assets and to sell at the highest price in the shortest period of time possible.
For commercial real estate pros, today’s Brave New World isn’t about survival of the fittest, machismo, or coveted portfolios, as it has been in the past. It’s now about walking away “whole” from maturing loans, assets with rising vacancies, and issues that could hinder an owner’s ability to buy properties in the future. And, in this strange new environment, walking away with your reputation intact is eminently feasible. Just ask Morgan Stanley, BentleyForbes Group LLC, and Tishman Speyer Properties LP—just a few of the high-profile owners who’ve done the “Dead Man’s Walk” (or, walked away) from properties this year in North Texas and elsewhere.
“We are busy in the best of times and the worst of times,” says Sylvan Rothschild, senior vice president of real estate solutions for Berkadia Commercial Mortgage. Berkadia’s nine asset managers in Dallas each have 15 to 22 distressed assets to work on every day and a 60- to 90-day window from their initial contact to decide whether the asset can be made healthy enough for a more immediate sale—or pushed and sold later.
Imagine for a moment that you’re the owner of a problem building. It’s natural for nerves to be jangled when it’s your first time dealing with a distressed property and a special servicer. Your palms are sweaty and your blood pressure is soaring—all because your “deal” has gone south. The acquisition loan is coming due, the tenant base has eroded, and the pro forma has proven to be pure fiction.
You can do nothing more than listen when the special servicer talks and, oh yes, choose whether or not to cooperate. You’ve heard tales about owners who’ve torn up leases as a stalling tactic rather than cooperate. But it’s never a good idea to ditch documents during a divorce—and this is a divorce of epic proportions. The main reason: if not handled correctly, this process could hamper your ability to do commercial real estate business in the future.
Special servicers aren’t the bad guys, though. If you play your cards right, you won’t be the fall guy—deeds in lieu, friendly foreclosures, loan workouts, whatever course you choose, the takeaway is that, these days, there’s no stain on your record as there might have been in the past. Everybody was overpaying from 2006 to 2008—when high-leveraged loans were there for the asking—so everyone’s in the same boat.
Not that working with a special servicer is a snap. With Rothschild’s team, for example, the first step is to bring in a property-management group and then a brokerage team. The bottom line is getting the property ready to sell—and sold—ASAP. “Foreclosure is only the very last remedy, not the preferred remedy, but sometimes [it’s] the only remedy,” Rothschild explains. “We’re actually the problem solvers. We’re providing an opportunity to the buying market. … We’re a very realistic seller, and we price real time. As a general rule, properties are selling for considerably less than the loan amount but at prices that are current.”
Rothschild talks about lower values (best guess is at least 30 percent below the loan value on the principal balance for a foreclosure), “subtracting to add value” to facilitate a sale, and a track record of avoiding foreclosure for 90 percent of the “real estate owned” properties that come into his group.
Rothschild finds solutions and builds value. That might mean emptying a building in order to sell it—like a case in St. Louis—or terminating a school’s lease for multiple student apartments at a multifamily development, as was done in Atlanta. There’s also the case in Far North Dallas, where Rothschild’s team negotiated a settlement with a tenant whose landlord had defaulted and wasn’t delivering on promises. The tenant was so happy that he expanded his lease, and the building was soon ready to sell.
“Every day, something positive is happening, because we’re building from converting a failed property into a situation where we can dispose of it,” Rothschild says.
While Rothschild can make the process sound painless, dealing with a special servicer for the first time still can be intimidating. So, if you’re a newbie to the game, you may want to seek advice first about the special-servicing route from some Dallas experts in investment sales. Two of the best are Jack Fraker, vice chairman of investment properties for CB Richard Ellis, and John Alvarado, managing director of capital markets and investment sales for Jones Lang LaSalle.
“Do you know what repression is? It’s a human self-defense mechanism,” Fraker begins, only partly joking. “I have repressed all the unpleasant memories from 2009.
“Not all real estate is ill-conceived or poorly located,” he goes on. “The pricing may have been too high at the peak of the market.”
Fraker’s industrial specialty hasn’t been hit as hard as office, retail, and multifamily properties. Still, a buyer is a buyer is a buyer. So you ask, “Hypothetically, if [a building owner] lost a property to special servicing or foreclosure, would that keep [him or her] from winning a deal in the future?”
Fraker pauses before answering. “There’s a slight perception probably with some groups. It’s not with all groups,” he says. “We have to ask probing questions about their source of equity and how they intend to finance it. If they give an answer that’s far from what we realize can be achieved in the debt market, that goes as a negative mark on their scorecard.”
And we live in a world of instant communication, Fraker stresses: “Everybody knows everything.”
Says Alvarado: “Most people recognize we have gone through an unprecedented capital event with worldwide reach and complexity. Most view projects that go into special servicing as a great opportunity, rather than one to be avoided. Most people who go into special servicing are entering that process with a cooperative mind frame that a compromise or a solution can be worked out that is best for the property.”
Alvarado points out, though, that “from a leasing perspective, there is a stigma associated with your property going into special servicing. They need to make sure to pay leasing commissions and to pay all levels of service.
“As we go forward, we probably will have to qualify buyers very closely,” Alvarado says. “But giving back properties won’t disqualify them from buying.”
Rothschild of Berkadia agrees.
“There used to be a stigma associated with special servicing. [Now] it’s become almost an everyday occurrence,” he says. “No one has immunity. It’s affected everybody from General Growth to the mom-and-pop who owns one strip service center in Desoto. I don’t see lenders refusing to lend to someone who’s been foreclosed upon.”
Rothschild’s last, best piece of advice? “Be honest, be candid, be direct, and provide the asset manager with every bit of information that you can,” he says. “Let’s work together, and let’s figure out a solution.”
Connie Gore is a veteran journalist who’s spent the last decade focusing on commercial real estate for daily newspapers and online publications. She’s currently a freelance writer.