Thursday, July 9, 2009

Voluntary defaults and alternatives

That's right, we're starting to see an interesting strategy being put into play: borrowers are intentionally allowing properties to go into default in order to renegotiate a deal with the lender.

In the case cited here, "Millennium Partners this week acknowledged purposely defaulting on its two-year-old, $90-million CMBS loan for the 277-room Four Seasons San Francisco with hope of renegotiating the debt with the special servicer, LNR Property Corp., because the hotel, once valued at $135 million, is now worth less than is owed. The strategic move appears to be working for Millennium and others in California, which has industry experts expecting a lot more of it."

Why? Because on these CMBS loans the master servicers are mute, and typically powerless to really do anything outside a very narrow box. The special servicer has to get involved in order to get any attention on a possible workout. So the borrower purposely throws the deal into default by not paying or by otherwise defaulting on some covenant.

This strategy, of course, has risks, especially depending on what state you are in and the foreclosure laws there. I think Maura O'Connor of Seyfarth Shaw (where, in the interest of full disclosure, I worked for a couple of years in the 1990s) takes a better approach:

So, in order to trigger a file transfer from the master to the special servicer, a borrower or its counsel should request such a transfer in writing (to the master servicer), and should spell out that a default is “reasonably foreseeable” and imminent, and explain why. (However, I do not think it is a good idea to default in order to trigger a servicing transfer!)
This quote is taken from the comments, and I think this and other concepts in Maura's series on workouts are the best approach. Intentionally defaulting should be a last resort.


Counting Sheep said...

This is off topic. But since you guys are in Chicago, does anyone know why Security Capital Management sold all of their Strategic Hotels stock? They had been about a 15% owner and dumped it all. Tony Mano is the President there if anyone is chummy with him.

David Stejkowski said...

No, I haven't been following SHC very carefully at all lately. Perhaps I should.

CountingSheep said...

To keep people current on left coast doings, the St. Regis foreclosure is delayed again.

St. Regis Foreclosure Auction Delayed Again

July 14, 2009 Print

The foreclosure auction for the St. Regis Monarch Beach Resort has been delayed again, according to Citigroup spokeswoman Jeanette Volti.
"There will be no auction today," said Volti this morning. "It has been rescheduled for Tuesday, July 21."

The auction was first scheduled for July 7 at First American Title in Santa Ana, but it was postponed to July 14 to allow for negotiations to continue between Citi and the St. Regis ownership group. That ownership group is affiliated with Makar Properties LLC, a prominent Orange County developer.

The ownership group has defaulted on $70 million of mezzanine financing borrowed in 2007, according to Citigroup documents. In all, the St. Regis borrowed more than $300 million in 2007, according to reports.

While the future ownership of the St. Regis is unclear, Volti stressed that the five star resort is still open for business. Dana Point City Manager Doug Chotkevys spoke on the subject at a coffee chat last month, informing the crowd that Citigroup had been to city hall to research St. Regis documents but also said he didn’t believe “the St. Regis is going anywhere.”

Stay tuned!

CountingSheep said...

Well, it is over. The St. Regis has been transferred to Citigroup.

David Stejkowski said...

So it was a deed in lieu, I guess, from what I am reading. Probably not a bad deal for Citi if you look at it as a long-term play, because we all know what building in the coastal zone can be like.

alyssa said...

you also more specify that how can works these alternatives.


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