This year comes to an end with a commercial real estate market looking different than 2009.  Sure, defaults on commercial mortgage loans are mounting, and investors remain concerned. Yet, at the same time, the public credit market (CMBS) is slowly making a come-back. In the midst of this change, there are good lessons to be learned – including changes to form loan documents.

More Negative:

  • CMBS delinquency rate rises: HousingWire reports on Moody’s statement that “The number of delinquencies in commercial mortgage-backed securities continued to climb in November rising to 8.63%”
  • Mario Mexia with NorthMarq notes that in Southern California, although credit is becoming more available, "investor mentality must shift and yield expectation must normalize in order for there to be a huge increase in sales transactions. The arbitrage between buyers and sellers will narrow when investors grow impatient and begin to get more aggressive."
  • Holders of CMBS bonds continue to wrestle with “how” they value their CMBS bond portfolio: NAIC hired BlackRock to assist in the valuatoin of CMBS bond holdings by insurance companies.  National Underwriter reports these findings and predictions by BlackRock:
    • "In the most conservative scenarios, prices are still falling today and the trough might not occur until early 2014. The CMBS price drop from the peak to the end of 2015 might be 46%."
    • "In the cheeriest, most aggressive scearios, the trough occurred earlier this year, and prices at the end of 2015 will be down just 9% from the peak." 

Positive Trend Line:

Clearly, we’re in that time of the market where we have a mixed bag: a lot of work remains to be done on distressed commercial real estate; yet at the same time, there is new liquidity coming from the CMBS capital market – attempting to quench a thirst for capital that greatly exceeds the amount available from banks and life insurance companies.  (This is the credit gap that I believe will be spanned by new, non-regulated lenders.)

Lessons Learned:

For the lenders returning to the commercial real estate market, what are some of the lessons learned? How should the loan documents or closing process be changed?

Some of the changes are very, very basic. Here’s an example of a notice provision found in many commercial loan documents:

Any Notice shall be deemed to have been received:  (i) if sent by telefax, on the date of sending the telefax if sent during business hours on a Business Day (otherwise on the next Business Day), (ii) if sent by registered or certified mail, on the date of delivery or the date of the first attempted delivery, in either case on a Business Day (otherwise on the next Business Day), (iii) if delivered by hand, on the date of delivery if delivered during business hours on a Business Day (otherwise on the next Business Day), and (iv) if sent by an overnight commercial courier, on the next Business Day, in each case addressed to the parties as follows:

What’s wrong with it? When the loan goes bad, and a default notice needs to be sent, where is the trip wire for the lender or loan servicer?

The problem in this clause is that notice via US mail turns on "the date of delivery or the date of the first attempted delivery” – which will require proof from the mail carrier of either the actual delivery or attempted delivery.  This proof will be in the form of the return receipt form prepared by the US Post Office.

With courts scrutinizing the foreclosure process, and requiring strict compliance with legal and contractual requirements, it is likely that a court could require an affidavit from the mail carrier (yes, the US Post Office employee walking the default letter to the door) – and the court might NOT accept the completed US Post Office form without testimony or a sworn statement from the US Postal Service employees on it’s standard practice in completing the form. There is a better, and  simple, approach.

Lesson Learned: notice provisions should be crafted such that notice is deemed given or received following certain steps or acts of the lender, with any proof of compliance in the hands of the lender (and NOT dependent upon testimony of or sworn statements from a US Post Office employee).

Here’s how the provisions above could be restated (showing "new" language with an underline and "old" language with a strike out):

Any Notice shall be deemed to have been received:  (i) if sent by telefax, on the date of sending the telefax if sent during business hours on a Business Day (otherwise on the next Business Day), (ii) if sent by registered or certified mail, on the third (3rd) Business Day following deposit with the U.S. Postal Service date of delivery or the date of the first attempted delivery, in either case on a Business Day (otherwise on the next Business Day), (iii) if delivered by hand, on the date of delivery if delivered during business hours on a Business Day (otherwise on the next Business Day), and (iv) if sent by an overnight commercial courier, on the next Business Day, in each case addressed to the parties as follows:

Some "lessons learned" are simple.

This simple change sure would’ve made some of my recent deals much, much easier.

If you have a comment on any of this, please post your comment below.

And Happy Holidays.