Commercial real estate industry leaders would like the Treasury to use an additional $20 billion of TARP money to back a separate lending facility just for CMBS buyers, according to Brendan Reilly, senior vice president of government relations at the Commercial Mortgage Securities Association.

With TALF promising to cover up to $20 billion in total losses on the loans, the proposed program would fuel bond purchases and spur CMBS lenders to make new loans. “That would help address the pricing and valuation issues that most of these markets are having as a result of illiquidity,” Reilly says.

Pendergast of RBS believes opening TALF lending for commercial real estate securities investments may help revitalize the sector. “We would very much like some form of government support for the CMBS marketplace,” she says. “If you can get lending kick-started at some point during 2009, it would alleviate some of the pressures on the commercial real estate sector.”

With billions of dollars in commercial mortgages maturing in the next two years and insufficient leverage in the marketplace, the government has good reason to loan money to lenders who are attempting to shore up their balance sheets so they can make new loans, says Brandt of Buchanan Street Partners. “There needs to be government intervention in this process.”

While it waits for a response from Washington, the MBA is instructing investors about the market forces weighing on the CMBS sector, and why buying those securities is still a smart choice. According to Jan Sternin, senior vice president of commercial/multifamily research at the association, teaching investors about transparency and the data available on CMBS will ultimately bring about new loan originations and bond trading.

“We do believe education is what will bring the investment community back,” Sternin says, “coupled with a little jump-start from TALF.”

Matt Hudgins is an Austin-based writer.

CMBS loan extensions are painful, but possible

The credit crunch has put borrowers with maturing conduit loans in a tough spot. Borrowers whose loans aren't securitized may be able to convince their existing lenders to provide new financing if they are unable to obtain a loan from another provider.

That's not an option for the conduit borrower because CMBS deals have a finite term that depends on the ultimate repayment of all loans in the pool, rather than a perpetual series of loan placements.

“CMBS servicers are going to take a much more legalistic approach than a commercial bank or life insurance company and are not going to have the same flexibility on restructuring a loan,” says Wayne Brandt, managing director of Buchanan Street Partners, a real estate investment management firm based in Newport Beach, Calif.

That's not to say that a borrower who is unable to find a new loan is doomed to foreclosure. A special servicer, which takes over from the master servicer when a borrower can't keep up with payments, can adjust or extend a mature conduit loan, according to John B. Levy, principal of real estate investment banking firm John B. Levy & Co. “Special servicers are extending and modifying loans depending on the specific circumstances,” Levy says. “That is starting to happen.”

Bondholders continue to receive regular interest payments when a conduit loan is extended, although the extension delays the return of principal. Alternatively, the special servicer may agree to reduce the amount of principal due on a loan, if doing so will avoid a larger loss to bondholders.

Levy offers the example of a borrower that is unable to pay the $10 million balance of principal owed on a loan at maturity. Depending on the quality of the collateral, the special servicer may agree to take $7 million as a discounted payoff. “If your anchor tenant just went dark, they might be delighted just to get $7 million,” Levy says.

It's important for borrowers to make an earnest effort to obtain financing on their own, starting as early as six months before their existing loans mature, says Stacey Berger, executive vice president at Midland Loan Services, a master and special servicer based in Bethesda, Md. A special servicer will be more willing to grant an extension to a borrower who can show a paper trail documenting attempts to secure a new loan.

If the special servicer agrees to extend the loan, the borrower should expect onerous terms such as increased reserve requirements, recourse provisions or a higher interest rate.

Those terms are designed to make the borrower uncomfortable, Berger says. “We want to make sure we are viewed as the lender of last resort for refinancing, and not the borrower's first choice.”
— Matt Hudgins