Pete Larsen, Attorney

The Impact of Coronavirus on CMBS

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Pete Larsen, Attorney, Leger, Ketchum & Cohoon

In today’s special Life in the Day of COVID-19 episode, you get a double whammy. First, my conversation with attorney Pete Larsen covers the impact of Coronavirus on CMBS. And to prepare for our conversation, I did some SEO research to discover what people are most interested in knowing about CMBS right now - what they are searching for online on Google.

From that research, I created an interview outline based on the most commonly asked questions about CMBS - and you can hear the answers in this podcast.

Plus, as a bonus, I wrote an article based on the podcast that follows that same SEO optimized outline (see link below for that).

Watch/listen to the podcast to hear Pete discuss how COVID-19 is going to affect CMBS delinquency rates and read the article to see some cutting edge SEO in action.

What You're Going to Learn

  • What are Commercial Mortgage Backed Securities?
  • How Do CMBS Perform in the Market?
  • How There's Nobody to Talk to Until You Default
  • What Remic Status Means for Special Servicers
  • Why You Cannot Sell A CMBS Loan
  • What You Need to Know About CMBS During the Current Crisis
  • What You Need to Know About CMBS During COVID-19 Coronavirus
  • Where Is Opportunity in Real Estate Today?
  • And much more!

Listen To or Watch the Full Podcast Here

Subscribe now on any of these platforms so you don't miss a single episode.


Show Highlights

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How CMBS Performs in the Market

ADAM GOWER: These CMBS, these securities are a package of potentially hundreds of loans. And you can buy the security and the security performs against the overall performance of the loans inside that portfolio. So do you buy them at par? Right. So you buy a bond and they have a coupon and then the par value can vary, which effectively changes the coupon. How do they work actually? Tell me about that.

PETER LARSEN: Yeah, I mean, the funny thing about them is they, kind of, work against the market. Right. So it's no different than stock trade. They're trading, you know, if a lot of them are being traded, then the price goes up because there's presumably a reason for that traffic. So sometimes they go up and down. They fluctuate that way, as far as the trade, right. But the performance of the loan is important in order for them to keep their their status, their tax status, which is a REMIC. It's called a REMIC: a Real Estate Mortgage Investment Conduit. So they have that, you know, for the IRS status, it's a REMIC. And so, one of the worst things that can happen, in this vehicle, is if loans start going default and they're not creating the income that was anticipated throughout the life of this CMBS vehicle. So if that happens, then the IRS could terminate it as a REMIC and then the whole thing blows up and they're not going to be able to sell. They'll have to fold up and start over. So that's what they're always worried about, whether or not it's performing as anticipated.

Remic Status: What It Means for Special Servicers

ADAM GOWER: Let's say one, has hotels and hospitality and those are dragging down the entire portfolio.


ADAM GOWER: How does that impact the REMIC consequences if there are just a few? Are they able to split those off in some way or are they all married? Is there any way to bifurcate the portfolio once it's been created?

PETER LARSEN: It's together forever. They're a family forever, you know, unless, of course, the loans gets paid off, refinanced and all that kind of stuff. So little by little, that CMBS issuance dwindles down.

But yeah, to answer your question. If you had a 20 loan portfolio CMBS issuance and 10 of those were hotels, then that could really cause some problems and what people are, what the, you know, what the special servicer is going to be worried about is whether or not that's gonna terminate the REMIC stats of the loan. So that's what their duty is to make sure that that doesn't happen. So they'll have to do whatever it takes to fix that. Whether it's a forbearance or, you know, a modification or whatever, in order to keep that thing alive. And that's what they have to analyze, the best thing. And then they have to get opinion of counsel to make sure it doesn't break the REMIC status. It's a whole process.

ADAM GOWER: And that REMIC status, that is a, those are specific financial criteria that talk about, the period of time that a range of loans inside a portfolio are in default and et cetera, et cetera, right?

PETER LARSEN: Yeah. It's basically an IRS vehicle, REMIC. It stands for Real Estate Mortgage Investment Conduit and it's an IRS vehicle and status.

So in order, they have to have that status in order to be rated properly and traded on public, you know, so there...

So if they lose that status, then they can't trade anymore and all those people have to, you know, then you have to liquidate the whole thing. It becomes a problem. So, it's a tax status I guess is the best way to say it.

ADAM GOWER: And who does that? Does the special servicer, if it goes into REMIC default?

PETER LARSEN: Yeah. So the special servicer is gonna be involved in making sure that it maintains its REMIC status and in order to do that, they have to, you know, try to come up with different ways to fix that loan, whether it be to get a new borrower in, whether it be to refinance it out, whether it be, whatever it is they're going to be trying to do. You know, I think for some borrowers, who got into CMBS and didn't really understand what CMBS was all about. They may be looking at this economic stimulus package to maybe help them out of the CMBS loan. I mean, that could be a possible avenue for them where they say, OK, you know, this is still a good asset class and we'll come back when the economy comes and we'll just refinance with a traditional bank. You know, we've got enough equity in it, now let's refinance. So that could be a way out for them because it's hard, it's really hard to deal with. And it's not just because the special servicers are trying to be hard. It's because they have a duty to maintain that REMIC status. And so, they only have certain things they can do, and then they have to get opinion of Council, Tax Council, they have to get opinion of the Borrowers Council, they have to get opinion of the Servicers Council and then it all, you know, in order for them to maintain that REMIC status.

Why You Cannot Sell A CMBS Loan

ADAM GOWER: So, as the special servicer now has some problem loans, right? They've got some loans, inside this portfolio, that they need to somehow resolve. Are they able to, one, give breaks to borrowers who maybe have either, you know,  problems paying or maturing loans and no way of refinancing them, or can they sell those loans? Can they take them out and liquidate them at a loss, to face value?

PETER LARSEN: Yeah, I don't think you would see a CMBS loan being sold which is unfortunate because I think that would be a much easier way for them to deal with it, but because they have to keep that thing intact. They're not going to be able to sell out individual loans unless they unravel the whole thing and sold out the loans, which isn't going to happen. So, yeah, I mean, but there are things that they can do for borrowers, so they might give them a forbearance or they might get a modification on the loan, especially given the history, right?  They know the entire history of the loan. So, you know, if you've been paying all along and the economy was going up and we're just in this little blip of who knows what, then they might give them 90 days to see what happens or they might, you know, modify it after this is all over, so they can, you know, they'd recapture all of the default amounts and put it into a new modification going forward.

So their payment might go up or whatever the interest rate would change, whatever. They could do some things.

ADAM GOWER: And the special servicer has that power.


ADAM GOWER: To renegotiate these.

PETER LARSEN: Yeah because their obligation is to make sure that the investment gives the best return. So that's what they are going to be looking to do.

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Where Is Opportunity in Real Estate Today?

ADAM GOWER: So the last time, you know, I sold, gosh, a billion dollars of these notes, one at a time. I don't know. You guys over there did vastly more than that. I remember you guys were in the deep end even more than I was. But the people that we were trading with, on the other side of those distressed loans made a lot of money. They were, it was with big risk. There was a lot of work involved. You buy a loan now, now you're the banker so you've got to deal with all the unraveling and everything that's associated with that. But if you knew what you were doing, it was good to me. It was a very, very, it was a period of wealth transfer. Yeah. Is that what we're going to see today? Put another way, where is the opportunity for investing in real estate in this context today?

PETER LARSEN: Yeah, I think absolutely we're going to see some discounted note sales happen. I don't know how many there's going to be.

I was in a conversation with a group of guys from Situs, from my previous, from, you know, the last time this happened and they were all wondering, you know, whether we're going back to that again. I think it will be a degree of that, but I don't think it will be to the same degree. So, you know, there are, you know, bad borrowers out there still and that probably, you know, were just riding the wave of the real estate and didn't really take care of their property and now that their property is not generating income and they're not being able to make their payment, we're going to find a lot of properties with deferred maintenance and all that kind of stuff that they, kind of, put off to the side to leech off the profits, you know. So, yeah, I think that's gonna happen. We're gonna find out as some of these go into default that they're not going to be able to come back and their property is in a state that they're not going to be able to convince the CMBS, the CMBS servicers, special servicer, that they can make it out of it. So, yeah, I think we're going to find some some transferred property here and It'll be at a discount.

ADAM GOWER: Yeah, that's interesting. So last time it was systemic. This time, really..

PETER LARSEN: It'll be more spotted.

ADAM GOWER: Yeah and also..

PETER LARSEN: Not all asset classes. It'll just be those guys who just, you know, maybe it's their first time around or maybe they're not as experienced or maybe they, you know, just wanted to make a quick buck and was and, you know, deferred a lot of maintenance.

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