Master Servicers, Special Servicers, and CMBS Financing 

Along with Fannie Mae® and Freddie Mac® multifamily financing, CMBS loans are one of the most popular ways to finance multifamily properties. CMBS loans, also known as conduit loans, offer a variety of benefits, including flexible borrower requirements, somewhat lenient rules for cash-out refinancing, and generous interest-only (I/O) loan options. However, one potential downside to CMBS is that these loans are not serviced by the lender that originated them, and are typically placed under the supervision of separate loan servicing company referred to as master servicer. But what if things go south and a borrower defaults on their loan? That’s when another company, called a special servicer, comes in.  

Special Servicers Can Help, But They Don’t Always Work In A Borrower’s Best Interests 

In an ideal world, a special servicer would do everything in its power to help the borrower get on track with their mortgage payments and get out of default, typically via a loan modification or debt workout. However, we don’t live in a perfect world-- and, furthermore, a special servicer’s stated goal is to advocate for the CMBS investors, not to help the borrower (though they are often the same thing).

If that were the only caveat to special servicing, then borrowers wouldn’t have too much to worry about. However, it isn’t; some special servicers are far more interested in their own profits than they are in helping either the borrower or the CMBS investors. For one, special servicers generally only receive compensation during the loan default period-- so it’s actually in their financial interest to make it a long and drawn-out process. In addition, most special servicers actually have the right to purchase a foreclosed property from the CMBS investors (usually for a steep discount), so it can often benefit them to simply let the borrower lose the property. In fact, a 2018 report found that the eight largest special servicers in the U.S. owned a combined 615 commercial properties, some of which they had held for more than five years. For some of these companies, it seems like special servicing is simply a lucrative backdoor into the real estate investing industry. 

Knowledge and Preparation Are Key For CMBS Borrowers  

Now, despite these issues, not every special servicer is out to take a borrower’s property-- some of them are highly ethical and dedicated to doing an excellent job. However, a borrower should never take out a loan with their eyes closed, particularly due to the fact that some CMBS loan agreements could make a loan go into default for non-monetary reasons (referred to as a technical default), sometimes for something as simple as sending a servicer a late P&L statement.

For this reason, potential CMBS borrowers should always make sure to hire highly experienced counsel to review all their loan documents before they sign anything. Of particular importance is the loan’s Pooling and Servicing Agreement (PSA), which identifies the names, rights, and responsibilities of the special servicer and the master servicer. As some of these agreements are 500+ pages long, borrowers will want a qualified attorney experienced with CMBS financing to review them and point out any potential concerns before they move forward with the closing process.