'Special Servicers' Getting Creative?

Today's Wall Street Journal reports:

Special servicers are dealing with an influx of souring loans backed by commercial-mortgage-backed securities, or CMBS: a total of $90.9 billion as of the end of September, compared with $73.8 billion at the end of last year, according to credit-rating firm Fitch Ratings. But the pace at which those loans have been resolved has picked up at an even faster rate, with $27.9 billion recovered by special servicers from bad loans in the third quarter, compared with $8.9 billion in the first quarter, according to Fitch.

Many of those bad loans are simply getting modified and extended, pushing the borrower's day of reckoning to a day into the future when, both sides hope, the market will improve to a point at which the property owner can refinance. But in other cases, servicers are trying more unusual methods to dispose of properties through sales or other means as they work through a volume of distressed loans that is testing the legal apparatus built up by Wall Street's boom-time securitization binge.

The creative approaches that are emerging could be good news for the multitude of buyers waiting at the sidelines of the commercial real-estate market hoping to see bargains. Up until now, there have been far fewer properties on the block than many investors were expecting when the recession hit.

Some of the new twists allow the special servicer to avoid the time-consuming and expensive foreclosure process. For example, a judge in Orange County, Calif., last month authorized the $213 million sale of Pacific Arts Plaza, a four-building office complex owned by MPG Office Trust Inc., which had defaulted on its securitized mortgage loan. But the buyer, local real-estate giant Irvine Co., didn't pick up the property out of foreclosure. Instead, the seller and the bondholders—represented by special servicer LNR Partners Inc.—agreed to have the property sold by the court-appointed receiver, avoiding a drawn-out foreclosure process and letting potential buyers assume the loan already in place.

"Special servicers are getting creative with how they're working out the assets in this environment," says Frank Innaurato, an analyst at Realpoint. "Rather than foreclosing on an asset, they are placing more properties in receivership and giving the receiver the right to sell the asset directly."

Avoiding foreclosure offers an additional advantage: Special servicers can sell properties with modified CMBS debt already in place. Take the case of an Arizona court's decision in August to let a portfolio of distressed apartments be sold by a receiver for $133 million. Bill Hoffman, president of the receiver, San Diego-based Trigild, said the move allowed the buyer to assume existing financing, delivering a higher price than if the portfolio had been sold out of foreclosure.

Putting a receiver in place hardly seems very 'creative' - more a matter of necessity....