During the peak of COVID-19, CMBS borrowers, primarily hotel and retail, were not generating sufficient revenue to make mortgage and escrow payments to lenders. As a result, loan servicers developed a plan to assist borrowers while still complying with the terms of servicing agreements. Master servicers (the servicers that handle the loans when they are performing), allowed CMBS borrowers to use replacement reserves to make mortgage payments and waived the collection of replacement reserves for a period, typically three months. If three months was insufficient, master servicers granted three-month extensions until the replacement reserve was exhausted. Once the property recovered, a repayment plan was offered to replenish the reserves. This relief was commonly referred to as a “performing loan consent.”
Borrowers that determined this relief to be insufficient, requested the loan be transferred to the special servicer (the servicer that handles the loan when in distress). The special servicer can provide more customized solutions than the master servicer. This route resulted in a much more costly solution for borrowers! While special servicers have more flexibility, that flexibility comes at a cost. While legal fees paid by borrowers were $2,500-$4,000 for a performing loan consent, legal fees charged by special servicers can be $20,000-$50,000. In addition, special servicers charge a 0.25% monthly special servicing fee for the period they service the loan and charge a 1% “workout” fee on execution of the relief agreement (known as “forbearance agreement”). These fees are substantial.
In retrospect, any borrower requesting a transfer to special servicing made a mistake, unless they had no replacement reserves and no outside liquidity to support the loan payments during the peak of COVID. ValueXpress advised its clients not to transfer to special servicing and even pulled some clients back from special servicing after they engaged ValueXpress to help. The result? Hundreds of thousands of dollars saved for ValueXpress clients.
The takeaway for future catastrophic events is to avoid transfer to special servicing at all costs and do not complain about replacement reserves required by your CMBS loan, they just may save you a lot of money in the future.
