News for the Hospitality Executive
Insights on the Mew CMBS rules: Dawning of a
New Era, or Error of a New Dawning?
Implications for Troubled Hotel Loans
|By Jeff Steiner and Jim Butler
September 18, 2009
On September 15, 2009, the United States Treasury changed the REMIC rules applicable to CMBS to give servicers greater flexibility to modify troubled commercial real estate loans. The changes are effective immediately and are implemented in final regulations under the tax code and a revenue procedure that is designed to provide guidance. In fact, the revenue procedure applies to loans modified after January 1, 2008. What does all this gobbledygook really mean?
CMBS defaults: A current issue with huge significance to all commercial real estate and real estate finance
More than $615 billion of commercial real estate loans is in the CMBS (Collateralized Mortgage Backed Securities) structure, and defaults are projected to reach more than 5% by the end of the year. Some analysts (such as Morgan Stanley's group) project that hotel loan default rate in CMBS will exceed 10%. In addition to ballooning monetary payment defaults caused by insufficient revenues to pay regular principal and interest payments to meet current debt service, more than $60 billion of maturities is coming due next year, and another $60 billion following that.
The lawyers at JMBM have been very involved in CMBS debt issues for a long time. We still receive many appreciative comments on the REMIC article that we published in 2001 and has borne the test of time in predicting the difficulties in modifying loans held in REMICs.
Now, we would like to give you our insights on the issues we see with the latest changes to the REMIC (Real Estate Mortgage Investment Conduit) rules, applicable to all CMBS loans -- whether hotel loans, retail, office, or other commercial real estate. These rule changes at least go in the right direction in terms of addressing some of those difficulties. But do they go far enough or can they even scratch the surface of the pending commercial real estate bust?
New REMIC rules' target: ability to modify loans without "blowing up" the tax status of the REMIC trust.
Many borrowers have encountered the dilemma that meaningful modifications of a REMIC loan could not be made by the servicers until a material loan payment default had occurred or was imminent. In what may turn out to be the most significant of the rule changes made, the IRS has stated in the revenue procedure that it will not penalize REMICs for making loan modifications when the servicers reasonably foresee a significant risk of default in the future. The other rule changes allow modifications and substitutions of collateral, modifications and additions of guarantees and revisions of recourse status of the loan to be made before a loan default has occurred.
Will these changes in the REMIC rules prevent a massive collapse of commercial real estate, or are there other factors that render the changes almost meaningless? Here is our initial take.
What is different? Liberalizing rules on loan modifications.
Q. Why do REMIC rules affect CMBS?We are very interested in your perspectives on the new CMBS rules and issues you encounter as a lender, servicer or borrower. Please contact Jim Butler or Jeff Steiner to explore this further.
About the Authors:
Jeff Steiner is is a partner in JMBM's Corporate Department and a senior member of JMBM's Global Hospitality Group®. Jeff Steiner's practice, spanning more than 30 years, emphasizes real estate, including: representation of both institutional lenders and borrowers in connection with construction and permanent lending, loan work outs and restructurings, real estate development, design and construction contracts, real estate acquisitions and sales, preparation and negotiation of commercial leases on behalf of landlords and tenants, joint venture transactions and hotel management agreements, purchases and sales and financings. For more information, please contact Jeff Steiner at 310.201.3514 or email@example.com
Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why. He devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group®—a team of 50 seasoned professionals with more than $40 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. In the last 5 years alone, they have brought their practical advice to more than 80 “hotel-enhanced mixed-use” projects, a term Jim coined to fill a void in industry lexicon. This term describes one of the hottest developments in real estate-where hotels work together with shopping center, residential, office, retail, spa and sports facility components to mutually enhance the entire project’s excitement and success. Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done. Jim is the author of the Hotel Law Blog, www.HotelLawBlog.com. He can be reached at +1 310.201.3526 or firstname.lastname@example.org.
|Also See:||The Hotel Owner's and Hotel Lender's Dilemma: Sell Now or Sell Later? How Long Does it Take to Market a Hotel Today? / Jim Butler / September 2009|
|Do You Know the 8 Dos and Don'ts of Handling Troubled Hotel Loans? / Jim Butler / November 2008|
|Workouts and Special Servicing for Hotel Mortgage Loans: What Is So Different About Troubled Hotel Loans / Jim Butler / November 2008|