Have Special Servicers Lost Their Way? CMBS Post
If you are a commercial real estate borrower and your loan isn’t in trouble, chances are you haven’t heard of a special servicer. With many commercial loans in default, however, the special servicer business is booming.
A master servicer typically services commercial mortgages. That entity typically collects rent and makes sure bills get paid. Most commercial loans have provisions for appointment of “special servicers,” however, particularly those financed by Commercial Mortgage Backed Securities (“CMBS”).
Most CMBS financed projects have specific rules in place that govern the appointment of a special servicer. Typically, these include when the borrower files bankruptcy, the borrower defaults or the loan is 60 or more days in arrears. When any of these events occurs, the loan is usually transferred from the master servicer to the special servicer.
Modern loan documents give great powers to the special servicer. Their primary duty is to protect the trust that owns the loan, not the borrowers. The trust’s pooling and servicing agreement generally governs these duties.
Borrowers, of course, usually want to retain the property and so they seek to modify the loan terms. When a special servicer is involved, however, that rarely happens.
Special servicers have a fiduciary duty to the bondholders (trust owners). We think that means getting the best value for the bondholders. Sometimes that means selling the property but often it means modifying the terms. Unfortunately, in our experience, we often see the special servicers simply foreclosing.
Concerns have recently arisen that some special servicers are using subsidiaries and deceptive tactics to purchase the property for themselves. Obviously, property buyers always want the cheapest price yet the special servicer is obligated to obtain the best price for bondholders.
Trying to big earn fees as special servicer while simultaneously attempting to buy the property creates a huge conflict of interest. Typically, those conflicts hurt both the bondholders and the borrowers. The only winners, of course, are the special servicers.
We have already interviewed one former special servicer employee (CW Capital) who tells us that conflicts of interest exist everywhere. Recently the New York State banking commissioner indicated his office is in the early stages of looking at possible double dipping or conflicts of interest in CMBS special servicer world and particularly, by the big three special servicers; CW Capital, LNR Partners and C-III Asset Management.
The purpose of this post is to seek information. The companies listed in this post have not been charged by regulators with any wrongdoing. If you have information about LNR Partners, C-III Asset Management or CW Capital, please contact attorney Christopher Katers at or contact the author, Brian Mahany, at (414) 704-6731 (direct). We would love speak with you.
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