The assumption process for a commercial mortgage-backed securities (CMBS) loan shares many of the process and underwriting fundamentals used by life companies, commercial banks and government-sponsored agencies. You will need a willing seller, a capable and creditworthy buyer and an attentive loan servicer to push the transaction along its path to closing.
But the pervasive problem with the CMBS assumption process – particularly from a customer's perspective (i.e., existing borrower [seller] and proposed borrower [buyer]) was the seemingly never-ending layers of consents and approvals to which each transaction was subjected.
The level of customer dissatisfaction with the CMBS assumption approval process is beginning to show signs of improvement as a result of the tremendous dedication displayed by the CMBS lender and servicer communities, the Mortgage Bankers Association, Commercial Mortgage Securities Association and the various rating agencies towards making the assumption process more efficient and transparent for the customer.
Collectively, these industry participants have embarked on a mission to educate borrowers about the nuances of CMBS loan structures, set borrower expectations, encourage industry-suggested best practices, retain and publish statistics of servicer time performance for assumption processing, and maintain task forces charged with continually enhancing the overall assumption process.
Despite the emphasis now placed on bridging information gaps and providing ever-expanding communication outlets on how a CMBS assumption actually works its way through the system, there was a time in the not-so-distant past that a CMBS assumption could have been characterized as a fairly routine servicing event.
Since the emergence of the credit crunch in the summer of 2007, however, a CMBS loan assumption has become anything but routine.
Driving this shift away from a routine servicing event is the dramatic reduction in new debt options for buyers – including the virtual evaporation of the CMBS loan market. As a result, the assumption of existing CMBS debt has become increasingly more important, and in many instances, it is the only way a that buy/sell transaction can be accomplished.
Falling rents, increased vacancies and rising cap rates are affecting credit decisions – to the chagrin of sellers and prospective buyers alike. Servicers are applying more stringent underwriting criteria in their analysis process.
These criteria include anything from the requirement of new third-party valuation reports and engineering studies, more detailed financial information on key principals and warm-body guarantors, exhaustive credit references and any other form of information that is deemed relative in analyzing a transaction.
The market forces are also contributing to an environment of increasing complexity and creativity for both the seller and the buyer in order to make a transaction appear economically attractive for both sides.
In addition, deal structures are hardly routine any longer, and in many instances, they resemble more of a loan modification than a debt assumption. This complexity is certainly the case when an assuming borrower wants to stack mezzanine financing behind the senior lien to transform the composition of the borrower structure from a plain-vanilla, single-purpose entity to a multi-pronged tenant-in-common structure, or close the sale in the form of a 1031 exchange or a reverse 1031 exchange.
With higher levels of underwriting demands by servicers, unique transactional structures and a market that appears to be on a downswing for some time to come, it appears that many of the strides that the CMBS industry players championed in making the assumption process a more streamlined and routine event are falling to the sidelines.
In many cases, the assumption process is less about customer-first and more about credit-first. Servicers are asking for more and more documentation to support their underwriting efforts, and the level of backup and support can be highly divergent between servicers.
Furthermore, it is not uncommon for an assuming sponsor to work with a single servicer on a set of multiple loan assumptions and yet be subjected to significantly different underwriting standards in order to satisfy the diversity of investors who have the ultimate say in whether an assumption is approved.
Today's assumption process can be confusing, chaotic and frustrating. In the end, the sellers and buyers who possess quality internal professionals and a formidable team of supporting cast members ranging from an assumption facilitator to sophisticated real estate counsel will ultimately conquer the CMBS assumption maze.
The first step in the process, however, is the recognition that what used to be a routine event is most likely a thing of the past.
Todd Moore is executive vice president and senior managing partner at 1st Service Solutions Inc. He has over 20 years of experience in various capacities related to performing loan servicing and problem-loan resolutions involving subperforming and defaulted commercial real estate loans. Moore can be contacted at toddmoore@1stservicesolutions.com or (817) 329-8067.
