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Commercial Observer Quotes Adam Friedman on CMBS Properties

August 10, 2018

Commercial Observer recently quoted Olshan bankruptcy partner Adam Friedman in an article that explores why special servicers—companies that resolve distressed credits by taking possession of and selling insolvent buildings to repay lenders—sometimes take upwards of five years to sell CMBS (commercial mortgage-backed securities) properties, despite a consistent decrease in the number of loans that have fallen into delinquency over the last 12 months (the lowest they have been in a decade). According to data from May, 2018, while only about 1% of the value of all CMBS properties outstanding were owned by special servicers that month (representing approximately $22 billion of the $1.79 trillion of assets that back CMBS deals), on average, these companies (of which there are eight that service all distressed CMBS loans in the country) took almost two years to sell these “real-estate owned” (REO) properties and almost four years in 20% of cases. These protracted REO periods jeopardize the special tax-preferred status that the IRS grants to the investment trusts or real estate mortgage investment conduits that typically hold these securitized loans. To maintain these tax benefits, servicers must sell their REO properties within three years and can apply for a three-year extension before losing their tax-preferred status. Compounding the problem, pooling and servicing agreements (PSAs), the legal documents that govern how any CMBS deals should be administered, are notoriously lengthy and hard to locate. As Mr. Friedman explains, “They’re public, but sometimes they’re hard for investors to find. You have to search hard for them.”  

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