CMBS Maturity Wave
A tsunami of loans is about to wash ashore.
years ago marked the beginning of the global economic crisis. Since that time
lenders have been working at a rapid pace to resolve distressed loans that were
coming into delinquency at record rates. Today, the economy has returned to
more stable ground with major financial indices reporting at levels that are on
par with, or better than, what they were prior to the economic downturn. Banks
have moved most of their special assets and are now looking to rebuild their
commercial mortgage-backed securities lending has shown signs of health to the
tune of $84 billion issued in 2013, and issuance anticipated to approach $100
billion in 2014. These positive signs give commercial real estate players a
little reprieve from the stress of the past few years. More importantly, there
is now an opportunity for borrowers, lenders, and investors to take the time to
prepare for the wave of maturities coming in the CMBS market.
reports vary, approximately $350 billion in CMBS loans are contractually slated
to mature from 2014 through 2017. This number represents approximately
two-thirds of the entire CMBS market. The peak of maturity defaults will occur
in 2016 and 2017, when the CMBS loans that were underwritten at the height of
the market in 2006 and 2007 will come due. Those loans were originated under
some of the most aggressive underwriting practices. For example, during that
time the accepted loan-to-value ratio was markedly increased from prior years.
new capital is increasingly available, borrowers need to anticipate that there
likely be insufficient funding to keep pace with the number of maturing
commercial loans entering the market for refinancing. To put this in
perspective, approximately $169 billion of CMBS loans were issued in 2005; in
2007, that number reached approximately $230 billion. With issuance hovering at
$100 million this year, there is a vast gap between issuance and what will come
due. Further, current capital is subject to underwriting standards that are
more stringent than those that were used at the time of origination. In 2007,
the Moody’s LTV
ratio was sometimes as high as 118 percent. Today’s originations are likely to require much lower
LTV ratios closer to the range of 70 percent to 80 percent.
that make a strategic plan with these facts in mind will be in a better
position to have productive conversations with lenders. Specifically, to
address the emphasis on lower LTV ratios, borrowers need to consider how they
may insert additional value into their projects to attract lenders. There may
be an opportunity to provide additional collateral to enhance underwriting for
extensions on either a short- or long-term basis. Alternatively, borrowers may
consider partnering with new investors that have the ability to contribute
equity to bridge the gap between available refinancing and the amount required
to satisfy the full amount of the outstanding balance of a matured loan.
with borrowers is only one opportunity investors should consider in connection
with the upcoming surge in maturity defaults. It is inevitable that certain
borrowers will be unable to come up with a plan to satisfy matured debts, in
which case the current holder of the loan may exercise its remedies. When this
occurs investors may have the chance to acquire properties through foreclosure
or receivership sales. Recent trends show that special servicers are
increasingly using note sales to transition distressed loans from the note
portfolios. This resolution is less costly and time-consuming as it does not
require a lender to go through the foreclosure or receivership process. As a
purchaser of a note that is in default, the holder would then have the
opportunity to enforce the loan, including the possibility of taking back the
intelligence also indicates that in addition to acquiring loans individually,
there will be opportunities to buy portfolios of troubled assets due to the
large number of CMBS loans maturing in 2016 and 2017. The competition for these
larger portfolios will be fierce with many groups already positioned to place
capital in the distressed loan market.
should likewise take advantage of this lead time to analyze the loans under
management that will be imminently reaching maturity. Having intimate knowledge
of both the loan file and the collateral will position lenders to maximize
recovery in the face of forthcoming proposals from defaulting borrowers.
Lenders should conduct loan reviews in order to identify and correct any
collateral or security deficiencies now. It is also worthwhile to analyze
recovery options in various jurisdictions. The stance that a lender may wish to
take with a borrower during resolution discussions may be impacted if the
collateral is in a jurisdiction with complex judicial foreclosure requirements,
as opposed to a one with a relatively quick non-judicial foreclosure process.
are extensive and ongoing discussions in the various commercial real estate
industry groups and media about the volume and timing of the maturity defaults.
Those who take advantage of the time leading up to the “maturity wave” will be the most likely to benefit in the long
Pruitt is a partner in the Birmingham, Ala., office and Jaime DeRensis is an
associate in the Nashville office of Baker, Donelson, Bearman, Caldwell &
Berkowitz, P.C. Contact them at firstname.lastname@example.org and email@example.com.