Wednesday, August 15, 2007

Buying a property encumbered by a conduit loan? Assume nothing.

I have a GREAT deal toy in my office. It is a bottle of Pepto-Bismol. It has an inscription: "Remind Me Again Why We're Doing a Conduit Loan Elixir." It is a reminder of the wringer a group of us went through doing a conduit loan for a regional mall some years ago. Why do people do this type of deal? You can, if the rates are right, save a bunch of money compared to traditional financing, and do much bigger deals as a rule.

(By the way, if you want to learn more about or more fully understand the nature of conduit loans and CMBS, try clicking here. This is at least a good start.)

Remember, because the holders of the CMBS bonds are expecting to clip coupons for the life of your loan, you can't prepay the deal. So, if you want to get rid of the loan for any reason (for instance, a sale), you have but two options. And the only things I can think of that are more painful than doing a conduit loan are (1) transferring that loan to a subsequent purchaser or (2) defeasing the loan. Tonight we'll discuss option (1). Option (2) deserves a section all its own another time. (Suffice it to say for now that it means substituting the collateral of the loan with enough US Treasuries to make all the loan payments.)

To make a short story long, I've had on more than one occasion the sheer joy and rapture of representing clients who were transferring or assuming conduit loans. So it was very interesting to read Kenny Pratt writing about this very topic today, if for no other reason than it makes you feel less alone. Whereas you saw a bunch of defeasances a few years ago because of low interest rates, I agree that you may well see more attempts to assign loans to take advantage of these locked-in rates. I feel sorry for the people involved in this deal, because you are at the lenders' mercy. I hope they are able to get the deal done more quickly, and I concur 100% with Kenny that there should be the ability to buy your way into premium service -- perhaps not unlike some companies in the defeasance business. (These people are my favorites.)


Kenny Pratt said...

David, I received a call from Key Bank (the master servicer) yesterday that really made me happy. It turns out that they realized my loan was languishing. My assigned underwriter is evidently fairly new at Key (and presumably slow). My file is now with her manager who committed to having it written up and to the Special Servicer on Monday. So far they have done a good job of recovering and restoring my confidence. The real test will be whether they follow through on the new commitment.

Thanks for reading my blog. I can't find an RSS feed on your blog. Is there some way I can subscribe?

David Stejkowski said...

You have a terrific blog. I hope Key Bank does not let you down; it does sound like you got their attention, which is always best done on the business side. The Atom subscription for RSS is at the very bottom of the page. I look forward to reading more from you.