CBMS Loan Negotiation--Proactive Approach Could Save Time and Money

CMBS loans (loans that will be packaged with similar loans and securitized as commercial mortgage backed securities) continue to be popular despite their rigid structure and higher costs. Many commercial real estate owners like CMBS loans for their nonrecourse nature, absent the commission of certain ‘bad acts’ by the owner/guarantors, and will pay the extra costs to limit their exposure on the loans.


When considering a CMBS loan there are a few items to address early on in the process that could have significant impact on the costs for closing the loan. 


Borrower Structure—CMBS loans rely on the mortgaged asset being held in a bankruptcy remote entity that meets specific criteria in how the borrower is structured and operated. A lender wants to protect the asset from being consolidated with the assets of other related entities that may become bankrupt.  The borrower should provide copies of its organizational documents earlier on in the process. Time is needed for lender and its counsel to review and provide comments on the documents and for the borrower and its counsel to revise as necessary. Sometimes, the ownership structure itself is a problem and new entities will need to be formed. If this process is delayed until later in the loan process, then extra fees will be incurred to pay for expedited processing of the new entities in time for closing.

Independent Managers/Springing Members—Depending on the size of the CMBS loan, the lender may require an independent manager be retained whose sole responsibility is to vote on whether the borrower should file for bankruptcy protection or not. Springing members are often required when the borrower is a single member LLC. If the sole member of an LLC were to cease to exist, it would trigger the automatic dissolution of the borrower entity. Under Delaware law, the LLC can provide in its operating agreement for a new member to ‘spring’ into place and keep the LLC in operation.  Since retaining an independent manager requires paying fees to a service provider for someone qualified to act in this role, a borrower would want to have this requirement waived whenever possible. If the loan is small enough, the borrower will likely be successful in obtaining a waiver. Regarding the need for a springing member, loan size again may dictate who can serve as the springing member. Some lenders will allow any individual associated with borrower to serve as the springing member, aka “special member.” Others require that the springing member be unaffiliated. The borrower would then incur additional fees to retain someone to act in that capacity; typically from the same service provider who provides the independent manager.

Governing Law—CMBS loan documents are typically governed by New York law, which then leads to the requirement for certain enforceability legal opinions from a New York attorney and also for the need of an agent located in New York to receive service of process on the borrower’s behalf. If the loan is small enough, and the borrower raises the issue with the lender, the governing law might be changed to the state where the property is located, eliminating the need for an additional legal opinion ($5,000+ saved) and an agent in New York for service of process ($1,000+ saved). At a minimum, many lenders will waive the need for the agent in New York on smaller loans.

Legal opinions—CMBS loans typically require more legal opinions in their financing opinion letters than local banks might require. The more complex the legal opinions, the more time required of the borrower’s counsel and therefore the higher the fee. Also, if the property is in a different state from where the borrower and its counsel are located, then a legal opinion from counsel in the real property state will also be required (add a few thousand more to the closing costs). Further, depending on loan size, ownership structure and the policies of a lender, additional legal opinions may be required, some of which can be quite expensive.  It’s important that the borrower confirm early in the loan process exactly what the lender will require. Some of the opinion letters may require extensive case law research to be conducted plus the retention of counsel in other states. Sufficient time needs to be provided for this.

Clearing/Lockbox Accounts—CMBS loans will also require some level of cash management to protect the lender’s security interest in the rents collected from tenants.  Selection of the bank to handle the clearing account (i.e., lockbox) can take some time.  Because an agreement will need to be negotiated among the lender, the clearing bank and borrower, negotiations often break down when the clearing bank wants changes that a CMBS lender is not able to give. This results in the borrower scrambling around to find a new bank who will sign the lockbox agreement. The paperwork needed to set up a bank account these days is not simple and it can take a couple days before the account is in place for closing.


Because of the above and other issues, negotiation of a CMBS requires a proactive approach by the borrower and its attorney. A failure to establish exactly what will be required or not early in the loan process can lead to delays in closing later and added costs to the borrower.


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