Expert: Commercial loan modifications possible

It's entirely possible for struggling commercial-property owners to obtain a loan modification, according to Kevin Kopp of 1st Service Solutions, a commercial-foreclosure-prevention firm. The problem is that most commercial-mortgage borrowers don't know the proper way to ask, he said.

It's not the borrowers' fault, said Kopp, director of the company's Scottsdale office, which opened in December 2009. 1st Service Solutions is based in Dallas.

Obtaining a loan modification can be difficult, especially if the loan is what's known as a commercial mortgage-backed securities loan, or CMBS loan.

CMBS loans are often tricky to modify, because the original issuer of the loan is no longer involved and the beneficiaries are individual and institutional investors, often scattered across the globe.

Once in default, a CMBS loan usually is managed by a loss-mitigation specialist known as a special servicer. Kopp said it's easy for commercial-property owners to get discouraged when trying to obtain a loan modification from a special servicer, because the negotiation process can resemble talking to a wall.

Kopp, who has 10 years' experience in the commercial-real-estate industry, said special servicers were essentially limited to accepting or rejecting the borrower's offer. They usually are prohibited from making a counteroffer or disclosing why a borrower's offer was rejected.

As a result, borrowers often give up after a couple of rejected offers, he said.

With about $36.5 billion in CMBS loans issued in Arizona and little improvement in the value of commercial real estate, Arizona could be headed for more serious economic problems if a high percentage of CMBS loan defaults end with foreclosure.

About $3.5 billion of CMBS loans in Arizona already are in default, Kopp said.

Nationally, the value of outstanding CMBS loans is $800 billion, Kopp said.

More than 60 percent of those loans were issued between 2005 and 2007, when commercial real estate was heavily overvalued, he said. Most commercial-mortgage loans don't face a serious risk of foreclosure until they reach maturity, usually after 10 years, said Jeff Boyd, a director at 1st Service Solutions.

That means the foreclosures seen so far among commercial properties barely scratch the surface of the problem, Boyd said.

"Absolutely, the worst is yet to come," he said.

But the situation isn't hopeless, according to Kopp and Boyd. For a fee, their company will structure a loan-modification proposal based on deals special servicers have accepted in the past.

While 1st Service Solutions' business model is relatively unique, it isn't the only company in Arizona that has successfully prevented a CMBS loan from being wiped out by foreclosure.

In a landmark case decided in 2010, a Maricopa County Superior Court judge held that San-Diego-based receiver Trigild Inc. could sell seven Arizona apartment complexes formerly owned by the Bethany Group of Irvine, Calif., without requiring the assigned special servicer to foreclose on the properties.

Bethany Group had financed the purchase of the seven apartment properties with a $164.5 million CMBS loan in 2007 and subsequently defaulted on the loan.

By allowing a new buyer to assume the CMBS loan, rather than wiping out the debt and forcing the buyer to pay cash, the court protected bond holders connected with the loan and prevented the seven apartment properties from losing at least $50 million in combined value, Trigild representatives said at the time.

Since 1st Service Solutions' Scottsdale office opened, Kopp said, it has negotiated $70 million in CMBS loan restructures and modifications using a variety of methods, including discounted payoffs, interest-rate reductions, forbearance agreements and extension of the original loan terms, Kopp said.

In all, the company's Arizona office has been engaged to modify or restructure $262 million in CMBS loans, with many still in the negotiating process.

Unless more commercial-building owners can work out deals with their lenders to avoid foreclosure, the real-estate and lending crises are likely to continue for years to come, Kopp said.

Investment funds and pension plans, too, will suffer if more CMBS loans cannot be modified, he noted.

Because of its early successes with obtaining commercial loan modifications, 1st Service Solutions has been expanding quickly, Kopp said.

Nationally, the company has doubled in size over the past 18 months, with 30 percent growth in the past four months, including the addition of two new senior executives.

It plans to hire three more asset managers within the next two months, Kopp said.

by J. Craig Anderson The Arizona Republic Jul. 17, 2011 12:00 AM




Expert: Commercial loan modifications possible