We see just about everything that happens to our clients. Here are just a few case studies that you may want to reference:

Case Study 1: "Springing Carve Out"

Situation: Owner of a Class-A office building located in New Jersey had a $41 million CMBS loan that was transferred to Special Servicing (SS) for non-payment of property taxes. The master servicer failed to account for the property tax abatement sunset provision and miscalculated the escrows needed to cover the full property tax bill. Owner provided a check for the shortfall of $50,000 but the check was returned by SS stating the amount now owed was $350,000. Owner refused to pay such a steep fee within days of loan being transferred, especially given the fault burdened by the master servicer, so SS aggressively pursued the asset via foreclosure. SS used the same local broker to perform a broker price of opinion (BPO) on the asset and ironically their value came in at $25 million when the BPO provided to the owner just one month earlier was stated at $47 million. Notwithstanding this odd set of circumstances, but the owner attempted to file Chapter 11 bankruptcy and subsequently was thrown out without prejudice. This only made matters worse for the borrower, because by doing so a nonrecourse springing carve out guarantee was triggered and the SS moved to mandate the loan be paid in full immediately, or risk losing the asset and all equity via foreclosure. This was a strategy the SS employed without hesitation. When the owner was brought on as a client he had less than one month before the Trust Deed Sale.

Mistake(s): Where the owner failed was to throw the property into a BK court hoping to “stave off” foreclosure attempts by the lender/servicer because there was equity in the property to protect. While this strategy can, and does, work at time for residential property, the same does not always hold true for commercial real estate.   Retaining legal counsel who filed the BK without understanding springing carve out guarantees as they relate to nonrecourse loans; and the fact said legal counsel filed the BK erroneously in DE where entity was filed, not NJ where the asset physically resides.

Potential Risks: By virtue of placing the property into BK court, the owner placed his equity at risk.

Outcome: After engaging a consulting firm the owner quickly had a team in his corner and engineered a strategy that would expose the master servicer for their oversight, provide evidence that the BPO provided to the SS one month following the initial BPO from the same broker was manufactured and deliver to a civil court the evidence required to stay off any foreclosure attempts by the lender/servicer. Had the owner come to our firm earlier, the need for any litigation would have been moot and the loan would have been taken out with new financing, which is what eventually happened. New capital was brought in and the CMBS loan was paid off in full and new equity was also brought in to help owner realize the maximum potential of the property by expanding the rentable space by another 60,000s.f. thus driving the NOI potential by more than 40% and immediately increasing the value of the asset.

Costs: Since the owner had made some critical errors at the onset, the costs were steep. Owners legal fees exceeded $300,000. Consulting fees included a $25,000 engagement fee and another $100,000 fee upon the conclusion of the assignment, which was rolled into the new financing.

Case Study 2: "White Knight"

Situation: A neighborhood retail shopping center located in Texas was under water and the loan was transferred to a SS for monetary default. The CMBS loan on this asset was $7.5 million and the SS announced to the owner they intended to auction the loan to another investor. The owner feared that a new owner could be a private party and not a chartered bank because a private investor is not beholden to the same limitations of fair and customary business practices as a chartered bank. This meant a private investor could charge excessive fees and penalties with the intention of making the cost prohibitive for the owner to dig himself out of the financial hole he was in, and the property would never recover. The loan went into default because the anchor tenant, a regional grocery store, vacated the premises and relocated to a newer center down the street.   The empty space was large and the market was too small to attract another tenant in need of the same space. As a result, the property needed to be repositioned and capital was needed to augment the empty space to attract smaller tenants. Over the period of months, the property was losing money, couldn’t pay all of its financial obligations and deferred maintenance on the property could no longer be addressed. Soon the property was vandalized and graffiti was sprayed on exterior walls, copper stripped from the empty space, other tenants vacated and the HVAC units were ripped off the roof.

Mistake: The primary mistake this owner made was not managing his tenant’s expectations and being more proactive in the lease negotiations. Notwithstanding this, the owner failed to maintain an adequate reserve for this very situation and should have reached out for help much sooner.

Potential Risks: If a private investor did purchase the loan from the SS, then the owner was most certainly at risk for losing this asset and any opportunity to turn things around.

Outcome: When the owner engaged us the loan was to be auctioned two weeks later. We quickly flew out to the asset, took photos of the property and listed everything that was “ugly” and all the deferred maintenance that needed to be addressed. Why? Because the SS would not openly provide this information to the other bidders on the loan and we wanted to create pause by the bidders in the event the loan went to auction. We wrote a letter on behalf of the client and directed him to send it to the SS. This letter included the pictures and list of deferred maintenance issues and a promise to disclose all of this information during the auction for his loan. The SS agreed not to auction the loan at that time, but gave him just 30-days to come up with a solution or they would proceed with the auction. We agreed to “White Knight” the deal and went directly to the SS to purchased the loan directly from them. The loan was purchase at a small discount from PAR and we in turn had another investor in tow ready to purchase the loan from us to help the owner stabilize the asset as JV partners.

Costs: The fees were minimal overall. The owner never retained legal counsel for this issue, but did eventually give up a significant interest in the property to the new partner who provided the new capital. The only fee paid to us was $25,000.

Case Study 3: "Strategy"

Situation: A small Class-B industrial building located in Virginia with a $5.7 million portfolio loan was being foreclosed upon by a regional bank due to the owner’s failure to provide timely financial reporting of the asset per the terms of the mortgage note. This was an owner-user scenario and the business was growing, but also had just weathered the financial recession that everyone felt across the US. The owner needed a modification of terms to allow for any arrearage to be paid back, plus provide ample time for the business owner/borrower to stabilize the business and grow revenues to the point of making good on the mortgage note. The regional bank was not as amiable to the idea and threatened to foreclose if their mandates were not met, which included full access to the company’s financial records. The bank went as far as sending representatives to the place of business several times unannounced demanding to see the financial records.

Mistake: The first mistake this owner made was talking too much. There was this inherent trust the owner had with the bank due to the fact he banked there for many years and knew all of the staff and branch managers.

Potential Risks: This was a mess. One, there were 60+ employees who worked here and this was a small town still suffering from the recession. This meant several local families relied on the business to make payroll to keep food on the tables and roofs over their heads. The owner was definitely on the losing end of the debate here and ultimately placed the space where the business operated at risk.

Outcome: Soon after the borrower came to us, we surveyed the lender docs and found the mortgage note was secured by more than just the building. The note was secured by the industrial building and a parcel of land (adjacent to the property) that was undeveloped. We determined the value of this land to be around $500,000 and immediately got the owners to consider carving out the land, selling it and immediately passing the proceeds from the sale to the bank. The only problem was the bank was holding the parcel as part of the collateral. We successfully engaged the bank’s legal department to modify the mortgage note, specifically drawing an amendment to permit for the release of the parcel as said collateral “subject to” certain performance and provisions being met by the borrower. We also needed to provide our Guarantee to the bank under a “bad boy” provision that what we were proposing was true and accurate. Anything done to the contrary would result in us being equally liable for the total amount due to the bank. The parcel was sold, but for $425,000 and we immediately turned it over to the bank, which brought the account due and then some. Immediately following this event, we brought a new capital source to the borrower to which we helped them refinance the asset.

Costs: The owner had some legal fees, but did not disclose to what extent. They paid us $25,000 plus a fee for the recapitalization of the loan.

Case Study 4: "A/B Note Structure"

Situation: A Class-A, high profile and well-known resort in California with a $186 million CMBS loan was being foreclosed on by the SS. The problem the borrower faced was how to work things out with the SS when the asset value was about 60% of what the loan amount was, and the property continued to lose money month-over-month due to poor management. The owners had also just completed a litigation matter with another party that cost them in excess of $5 million, so the reserves for another legal battle were low.

Mistake: The first mistake the owner made was changing managers for his property without consulting with an industry expert to determine how the new management company would fit with the overall scheme and business plan for the property. As a result of his short-sighted and ill-advised decision to bring in the new manager, the property started losing revenues almost immediately. Things didn’t get easier when a like-kind property down the street underwent a $150 million renovation and was attracting customers away from the property.

Potential Risks: Obviously losing any asset this large would be a blow to the portfolio, but this was a “trophy” property that was underperforming and had tremendous upside.

Outcome: There was no way the SS would agree to a cram down. Not because it wasn’t a viable idea, but the SS was very interested in acquiring the asset. Once we got the owner on board with the reality of the situation and quantified the risk of losing the asset and its impact on his portfolio we were able to successfully get him to concede to the idea of creating a A/B “hope note” with the SS. At first the SS was less than excited about the idea, but we convinced them to reconsider when we learned their position in the junior traunch within the REMIC was at jeopardy should they foreclose, which would force them to report the losses. Losing control of their position meant they no longer could collect fees and would acquiesce to another SS positioned in the next junior class in the money.

Costs: Not confident we ever found out how much money they spent with other outside counsel and resources, but our fee was $50,000 and they were happy to pay it, especially since no other group was successful at identifying the Achilles heel of the SS and making the A/B note structure a viable solution.


Client and asset information protected to ensure client anonymity are adhered to pursuant to the firm’s privacy policies.

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