Imagine that you are a borrower on a major commercial real estate project. Your project has plenty of equity but cash flow is tight. Despite the tough economy, you manage to hold on. As things get worse, the designated special servicer on your loan invites you to miss a payment so they can get involved and “help” you modify the loan terms. You do that and instead of getting help, you are suddenly facing a demand for a deed in lieu of foreclosure.
Fantasy? Keep reading. At least one hotel owner says that special servicer LNR Partners is guilty of those things.
Unless you are familiar with commercial real estate lending, the term “special servicer” may be foreign to you. If you slip behind in your payments and the loan is owned by a trust or CMBS (“Commercial Mortgage Backed Security”), you will probably find yourself dealing with a special servicer. These are the folks called in to manage troubled assets.
Theoretically, the special servicer’s job is to quickly get the mortgage current or maximize the recovery for the trust. Their duty is obviously to the trust that holds the note and mortgage and not to the borrower. Modern day loan documents typically give special servicers vast powers. That doesn’t mean they don’t have to play by rules, however.
Recent lawsuits across the country suggest that special servicers may be more interested in inflating their own fees than maximizing the amount of recovery or protecting the CMBS trust.
Readers of this blog know that we have posted several stories about cases against special servicers. The three largest special servicers are LNR Partners, CW Capital and C-III Asset Management.
Most of the cases against special servicers are very recent but in doing research in another case, we stumbled across a claim filed in 2011 against LNR Partners. According to the South Florida Business Journal and records obtained from the clerk of the bankruptcy court in Miami, a Miami Beach developer, Martin Taplin, claimed that LNR is guilty of fraud in the way they handled the foreclosure of the famed Sagamore Hotel in South Beach.
Taplin, an owner of the hotel, claimed LNR’s “defective practices in foreclosure processing is widespread, documented and beyond dispute” and that “Sagamore is not the lone victim of LNR’s scheme to inflate its own fees while destroying the value of real estate.” More ominously, Taplin claims that LNR wants to “pirate” the hotel for its own gain.
Those allegations culminated in a hearing in November of 2012. Two years later and the parties are still fighting in court.
Obviously, we have no idea if Taplin’s allegations are true but we have seen a disturbing trend of special servicers attempting to put their financial interests above the borrowers and even the clients they serve. New York State is contemplating investigating LNR, CW Capital and C-III.
Some say that special servicers are rigging auctions or trying to get less for the property so they can acquire the property themselves. (There is no evidence that happened with the Sagamore – the foreclosure never made it that far as it is mired in bankruptcy court.)
Since posting our first story on the 4th of July, we have already heard from one insider who has verified our worst thoughts. As we continue to investigate these cases, we invite others with inside knowledge to come forward. We also welcome the opportunity to talk with those who feel victimized by banks, master servicers or special servicers.
Post by Brian Mahany, Esq.