Mitchell Kaplan Quoted in Debtwire
"Commercial Real Estate Loan Workouts Face More Hurdles Than Resi Mods; AAA CMBS Spreads Reach 850, Sources"

Mitchell Kaplan was quoted in the November 13, 2008 issue of the Debtwire in the article, "Commercial Real Estate Loan Workouts Face More Hurdles Than Resi Mods; AAA CMBS Spreads Reach 850, Sources." The article discussed how workouts for struggling commercial mortgages are wildly expected, but that the process is not only lengthy but also full of complications. Since foreclosures and refinancing are less viable in the current market, many special servicers will in many cases try to make loan modifications work. According to Mitchell, "The process of modifying a large commercial mortgage loan which has been securitized may be a slow one." Mitchell said that large loans securitized in CMBS form – say, loans of USD 100m in size or bigger – often involve several lenders. He continued that there may be a large A-note in the REMIC trust, but also subordinate notes outside the trust. In addition to the subordinate notes, which are all secured by the real property, there could be one or more mezzanine loans, secured not by liens on the real property but rather by pledges of equity in the borrower.

The junior-most noteholder typically has to be consulted and consent must be received from such noteholder before any workout can take place, Mitchell said. He continued that it can be demonstrated – via appraisal – that the junior-most noteholder no longer has a viable economic interest in the deal if the property value has fallen far enough, however, and therefore their consent will not be necessary. Yet even in this case, the next most junior class of noteholder will still need to give their approval. In other words, between the special servicer, the junior noteholders and possibly the mezzanine lenders, if applicable, "You have a lot of different players [who] probably all need to get on board for a restructure to work,” Mitchell added.

“There will be more” need for commercial mortgage workouts as property values continue to fall, Mitchell added. And even without a continued decline in property values, problems may arise soon for loans that are current but due to reach maturity, because borrowers are likely to face difficulties refinancing those loans, he said. Parties facing such maturity date defaults “will have to get together to work out or extend the loans,” he said. “We will definitely be seeing quite a bit more of these workouts or proposed workouts” going forward, Kaplan concluded.