A detailed read of the 699-page prospectus for the CMBS issue from Jeffries LoanCore, Goldman Sachs and Citigroup (GSMS 12-GCJ7) that closed in June 2012 revealed some interesting facts regarding refinance loans in which the prior lender was being paid off at less than the full amount due. Pages 29-30 of the prospectus state: “Seven (7) of the mortgage loans, representing approximately 13.7% of the aggregate principal balance of the pool of mortgage loans as of the cut-off date, were refinancings of defaulted loans or otherwise involved discounted payoffs.” The prospectus described a $5-million principal forgiveness from the prior lender on the 4th-largest loan in the pool, an $87-million industrial loan. In addition, the majority of the 10th-largest loan, the $47-million McCraney Industrial Portfolio, went to pay off a $63.5-million obligation for only $39.6 million.
“Whereas the commercial banking system is not inclined to finance a property in which the prior lender is taking a loss, the nature of CMBS underwriting is on current and sustainable cash flow, including appropriate vacancy, management fees, and capital reserve assumptions, that concludes an appropriate loan amount,” notes Michael D. Sneden, Executive Vice President at ValueXpress. “If the concluded loan amount is acceptable to the borrower, the amount it pays off is almost immaterial, allowing for discounted payoff situations.”