The Background

From 2005 to 2007, lenders originated over $600 billion in commercial-mortgage-backed securities. Because these loans typically have a ten-year maturity date, this means that the majority of these loans are going to begin maturing in 2015, for a total of over $350 billion. The state of the market immediately preceding the financial crisis means that most of the loans made during this time period had increasingly higher LTV ratios and drastically reduced reserves coupled with interest-only payments and inflated property values. The increases in LTVs from 2005 to 2007 means that the CMBS maturities are going to be increasingly overleveraged as we progress from 2015 to 2017.

The LTV-Rate Problem

Nearly half of the CMBS maturities scheduled for 2015 have LTV rates that are above 80%, which is more than most new lenders will be able to offer. Additionally, lenders providing new funds to pay off the maturing CMBS will be focused on the value of the property rather than the borrowers’ potential proceeds when determining the amount of the new loan. This can be bad for the borrower because the special servicers of the CMBS are obligated to maximize their recovery when the loan matures, so they’re more likely to opt for foreclosing and reselling the property at market value than accepting only 80 percent of the value from the borrower.

Borrowers’ Options

Borrowers with lower LTV rates (below 80%) have three options: a new loan at a high enough LTV rate to pay off the full loan amount; a mezzanine loan to boost the borrower up to the necessary amount of leverage; or a bridge loan to pay off the existing loan in full until a new loan can be obtained.

Borrowers with LTV rates that are over 80% have less pleasant options to choose from: request an extension from their special servicer if they prove they’ve tried and failed to obtain a new loan (this can result in extra fees and required pay-downs); appeal for a discounted pay-off of the loan (this will likely be for 100% of the property value, which is more than a new loan will provide); pay it off out of pocket (this will likely tie up any liquidity or leverage in the borrower’s portfolio); relinquish the property via a deed in lieu of foreclosure (this will result in no further costs to the borrower as CMBS loans are nonrecourse); or short sell the property (this would avoid a deed in lieu of foreclosure turnover, but may not be allowed by all special servicers).

The options presented here are just basic generalizations; borrowers with maturing CMBS loans need to consider all of the factors that influence their loans, such as the special servicer’s requirements, the controlling class certificate holder, the amount owed on the loan, and the property’s potential future value.

Fixed Maturity Dates Perhaps the most critical aspect to understand about CMBS loans is that the maturity dates are practically immutable. Most of these loans have a strict open period during which the loan may be paid off without penalty before the maturity date. If a borrower pays the loan off either before or after this open period, then significant penalties will be applied, resulting in even higher costs for the loan. Paying off a CMBS loan early can result in defeasance fees, while paying after the maturity date can cause your loan to accrue late fees of as much as 5% of the entire loan principal in addition to default interest. While forbearance is possible, it must be formally requested and is not guaranteed.

The Oncoming Storm

With all of the overleveraged CMBS loans that will be maturing in the next three years, it is imperative that borrowers with these loans start planning their exit strategies as soon as possible, as much as a year out from their set maturity date. In addition, the high numbers of borrowers looking for loans to refinance their maturing CMBS loans will cut into the funds that are available for borrowers wanting to finance purchases of new commercial properties in the next three years. This will make the commercial mortgage market increasingly competitive, while at the same time forcing borrowers to be more creative in their funding options, which is where hard money will swoop in to save the day for those who are able to work around the system.