Special servicer replacements for troubled CMBS loans on the rise

An increase in parties overseeing the workout of CMBS loans is expected as the right to appoint new servicers shifts across the capital structure, Academy Securities' Stav Gaon notes.

The potential for special servicer replacements on distressed commercial mortgage-backed securities loans is increasing as more loans come up against performance or maturity issues.

Special servicers – the parties that oversee the workout of troubled CMBS loans – are assigned to deals at the time of securitization with the aim of maximizing recoveries via a variety of strategies, including modifications, extensions or note sales, in the event of a problem.

However, CMBS bondholders can vote to replace the special servicer as it proceeds through a workout, which can lead to a lack of continuity or clarity in the workout of a troubled loan, notes Stav Gaon, an analyst at New York-based Academy Securities.

“We expect a rising frequency of special servicer replacements, as the right to terminate servicers and appoint new ones shifts across the capital structure [as the valuation of the underlying property changes],” Gaon says.

This scenario was seen in October with the workout of a $308 million loan on New York’s 1740 Broadway, a Class B office building securitized in BWAY 2015-1740. The loan was transferred into special servicing after New York-based manager Blackstone ceased payments in March 2022, Gaon notes.

Since the loan was transferred into special servicing, the loan servicer has changed from Green Loan Services in March 2022 to Midland Loan Services in February 2023. In August 2023, CW Capital replaced Midland and, at that point, hired Dallas-based advisory CBRE to sell the loan.

But in October, Midland was re-hired to service the loan – and it is no longer clear if the loan will be sold, Gaon says. The loan, which had been posted for sale on the R Marketplace auction website, is no longer there, and according to published servicer commentary, Midland said it was working to figure out the best approach.

The frequency of servicer replacements stems in part from 1740 Broadway’s declining appraised value, Gaon explains. At the time of acquisition in 2014, 1740 Broadway was valued at $605 million. But its valuation was pegged at $175 million in April 2023, with Gaon noting declines in valuations have an impact on which group of bondholders is the controlling class of the deal. And as the controlling class changes, this can also lead to changes in the special servicer, or the workout strategy.

Especially complex

The situation is not unique, with Gaon underscoring replacing servicers makes it difficult to understand where a loan is in the workout process or determine which party is handling the workout.

“To be sure, the complexity of the 1740 Broadway workout, and limited availability of public documents on the note sale, make it hard to conclusively tie the special replacement to the note sale cancellation. But the rapid replacements of the specials in recent months and the varying classes that directed those replacements, underscore investors should not expect continuity or clarity on handling troubled loans as specials change over,” Gaon adds.

Officials at CBRE and Midland respectively declined to comment on a potential loan sale, citing client obligations. A spokesperson for Blackstone responded via a written statement, noting: “[Blackstone] wrote this property off two years ago, and in the event a buyer is identified, we will work collaboratively to transfer the ownership.” Blackstone is not involved in the note sale, the spokesperson added.