CMBS borrowers are required at all times to be a Special Purpose Entity, which includes, without limitation, (1) the prohibition against incurring any indebtedness other than as set forth in Loan Agreement (essentially trade payables) and (2) the requirement that the borrower pay all of its own liabilities and expenses, including the salaries of its own employees, out of its own funds and assets. PPP loans violate these provisions.

Thankfully, loan servicers are approving CMBS borrowers obtaining PPP loans routinely. The approvals require copies of all the loan documents and representation that funds will be used as set forth in the provisions and guidelines of the CARES Act. In addition, the borrower shall use its best efforts to obtain 100% forgiveness of the PPP loan principal. When the borrower applies for loan forgiveness, the borrower agrees to provide lender a copy of all documentation and information submitted.

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“Due to the enormous control b-piece bond buyers have to shape the composition of CMBS issues through kick-outs of loans they do not like, origination of CMBS loans for securitization has become a ‘best efforts’ exercise for less-desirable loans for the near term,” said Michael D. Sneden, Executive Vice President of ValueXpress. “If the b-piece buyer blesses the loan, then the lender will close it; otherwise, the lender refuses to close the loan, creating considerable uncertainty and potential wasted time and money for borrowers.”

This process is quite different than what occurred last year. At that time, when a loan was kicked out by a b-buyer, the lender closed it anyway and simply contributed the loan into the next CMBS pool. Now lenders are unwilling to take the risk that the loan would be repeatedly kicked out.

The 5-year term can be selected by the borrower as the desired term when the Term Sheet is executed. Alternatively, the borrower can proceed with a 10-year term option, and if the b-piece buyer accepts the loan, it can be closed and contributed to the CMBS pool as a 10-year deal. If the b-piece buyer rejects the loan, it can be closed as a 5-year deal as a backstop and held on balance sheet. While this may not be ideal, the program provides a reasonable alternative to no loan at all.

“Thankfully the vast majority of our loans pass the b-buyer smell test,” noted Sneden. “Therefore, this program will really serve as a backstop. But there is never anything wrong with having a back-up plan, particularly in volatile markets.”

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