The destructive natural disasters, including hurricanes, wildfires and tornados, that have occurred this year are resulting in a spike in insurance claims for CMBS borrowers. Many of our clients are reaching out to ValueXpress for assistance with coordinating approvals of insurance claims on their properties with insurance adjusters and CMBS servicers. We provide this service at no charge to our clients. Many of our clients are unaware the servicer needs to be notified in the case of a loss, depending on the amount of the claim.
The first step to determine the level of servicer involvement is to calculate what is known as the restoration threshold. In the CMBS Loan Agreement, the restoration threshold will be defined as a percentage of the loan amount, often 3%. So on a $5-million loan, with a 3% hurdle, the restoration threshold is $150,000. This means that the borrower may negotiate an insurance settlement without servicer involvement at or below that dollar amount, and although the settlement check will be payable to both the borrower and the servicer, the servicer will promptly sign over the proceeds to the borrower and the borrower will be obligated to complete the restoration.
For damage above the restoration threshold dollar amount, the process is more involved. The borrower may settle and adjust such a claim only with the prior written consent of the servicer, and if the borrower fails to settle and adjust such a claim within sixty (60) days after the casualty, the lender has the right to settle and adjust the claim at the borrower’s cost and without the borrower’s consent.