Earlier this week, another member of ACMA called me to ask if I’d be on a panel (at the ACMA fall conference) that will cover "lessons learned for loan documents."

It was an easy "yes" for me – because I’ve covered parts of that list here (new non-recourse events); and as we work on distressed mortgage loans, we’ve been collecting and creating this list.

Here are a few more items from our list, with another comment by me on "how" they point to a very, very basic change looming for commercial real estate: transparency is arriving.

  1. New Financial Reporting Requirements:  commercial real estate finance is all about income and the ability to track and analyze – and to do it quickly and in a manner that allows for better decision making across the entire portfolio (since work loads increase – they do NOT decrease).  So, the loan documents need to support all of this.  Here are a few of the "new" provisions that we’ve seen implemented in workouts and now in new loan document forms:
    • the ability to dictate the format of reporting, such as the use of spreadsheets, XML formatting, and even the use of new data standards (such as those created by MISMO)
    • the ability to require new reporting requirements in the future, based on Lender’s regulatory or investor requirements
    • rent roll and operating statements on at least a quarterly basis
  2. Investors Need Transparency:  I firmly believe that a meaningful return of the CMBS market or product will require better loan level transparency.  It is a view that I now share with PWC, which leads off a recent report with this point:  "Rebuild investor confidence through transparency, expanded disclosures, and enhanced quality of information."  But loan level transparency is a very basic battle of perspectives:
    • commercial real estate professionals believe that the value of their project is closely tied to the "secret" recipe baked into the project by the developerowner (the recipe is the terms of the leases, the terms of the underlying debt, etc.) – and while the value of a project is grounded in the rental stream, the "details" can not be shared (such as the rent roll and lease summaries)
    • investors want to know "what" they are buying, and on the topic of CMBS bonds, a rating agency stamp of approval (i.e., a rating) is not nearly enough information; so this means they want (and I believe deserve) loan level information on lease terms – including the rent roll and the lease summaries

 Please post your comments below.

Below are some observations and comments collected by me from formal and informal meetings, and random conversations though lunch on this second day of the 2011MBA-CREF Convention.

They do reflect my "coming up roses" word picture for ’11: we’ll have more roses blooming in the commercial real estate finance garden, but in ’11 we’ll still be dealing with the continuing bad or under performing product as well.

  • Technology: more signs that technology is changing commercial real estate –
    • Loan Servicing: Investment made by portfolio lenders and loan servicers in databases have been a huge help in assessing tenant-mix risk and in responding to tenant defaults.  This has been money well spent.
    • Loan Production and Underwriting: a next step in the use of technology will be the utilization, by commercial real estate lenders and servicers, of databases used by commercial lease brokers, who have built databases showing entire lease stacking plans (showing full lease terms) and debt payment terms covering buildings in specified markets; these tools will assist commercial lenders and investors in differentiating assets – and in making better investment decisions ("private is the new public").  
    • REO Management: increasingly, apartment rental rates and terms will use database-driven yield management tools, which allow apartment owners (and foreclosing lenders) to set apartment terms based upon "real time" market terms.  (One comment: 30-40% of all first-class apartment operators use this type of too.)
  • Market Share: CMBS – How deep is the CMBS investor market?
    • Life companies and hedge funds will only support annual new issuance of CMBS of no more than $100Billion
      Investors will fight for loan level information (at the time of securitization and during the entire term of the pool) ("private is the new public")
  • Market Share: Life Insurance Companies continue to "take back" market share "lost" to the CMBS loan market – How?
    • better pricing
    • better closing process (shorter loan documents, less structure, etc.)
    • focusing on "best" properties, in the "best" markets
    • let the 25+ CMBS lenders fight over the secondary properties

That’s it for now.  Off to lunch.

Please post your comments or questions below.

More on the trend pushing for loan level transparency, which I believe is a needed second step to create a deep and vibrant CMBS market . . . . one in which investors have needed information and thus can more accurately evaluate risk, and consequently commit more capital to the product – and to remain committed.

(Can we agree on this: we need MORE investment capital in commercial real estate? Sure, pricing is a [superficial] problem, but isn’t the fundamental problem one of information?)

And, I’m convinced that technology is in place, which will make loan level transparency a reality.

If I’m correct, then who will lead the charge?

Recall that the SEC is pushing for disclosure of loan level information, in what I call "private is the new public." (For my other entries on this topic, search this blog with the term "transparency.")

But can the will to generate loan level information be driven from within the commercial real estate industry?  What commercial real estate niche or player will take the finger out of the information technology dike?

It certainly is NOT –

  • loan servicers, who are not sufficiently capitalized to capture and manipulate information as data
  • lenders (and loan originators) have been bailed out (without having to embrace transparency) andor are profitable again (and thus not motivated to invest in change)
  • investors, who have other asset classes to place their capital (why should they bring commercial real estate into the information age? they buy a product – not manufacture one)

So, if not servicers, lenders nor investors, then who takes their finger out of this dike?

Maybe this one:

  • Apartment landlords

In the Tuesday, January 4 edition of the Wall Street Journal, Dawn Wotapka has a piece titled "Landlords Upgrade Rent Monitoring."

She reports that sophisticated apartment landlords are using database driven software to collect market rental information, allowing them to quickly make rental rate adjustments to optimize apartment income – in the same was as airlines, hotels, and casinos gather real time information for real time pricing decisions.

This simple use of technology creates valuable information.

This will be information that:

  • lenders must approve (if loan documents give lender the right to approve rental terms – or perhaps the method of establishing rental terms)
  • Investors will seek before they invest (and continue in the investment)

Like all data: the "best" data is created by an initial user, and once it is created, it has immense value to the balance of the investment capital food chain.

Here it comes.

So, what do you think?  Will this little hole in the dike be the beginning of the information age in commercial real estate?

Or, is commercial real estate simply a "one-off" jewel, incapable of understanding by anyone other then the jeweler?

Please post your thoughts below.

Many provisions of the Dodd Frank Act are what I call "delegated legislation" – where Congress authorizes Federal Regulators to craft regulations based upon broad principals or statements contained in the Act.  (Here are two helpful summaries; and here is a time line on regulatory implementation of rules covering commercial real estate)

One topic that is being closely watched, and that is a source of much angst, is this one: transparency at both issuance AND periodically in the future.

Earlier this month, the SEC (in its role in implementing Section 943 of the Dodd-Frank Act) issued a proposed rule that points to this type of transparency, in the context of representations and warranties in asset-backed securities (ABS) and commercial mortgage backed securities (CMBS) offerings.

While the substance of the proposed rule will NOT overtly affect the owner of any particular loan in a CMBS loan pool, it is consistent with this transparency movement.  One result will be greater use of technology in collecting information, and ultimately perhaps even broader dissemination of loan level information – or what I call the "private is the new public."

Here’s the summary furnished by the Mortgage Bankers Association on the proposed rule:

  • the offering issuer must disclose fulfilled and unfulfilled repurchase requests across all transactions
  • rating agencies must include information regarding the representations, warranties and enforcement mechanisms available to investors
  • the rating agencies must include a description of how these representations, warranties and enforcement mechanisms differ from those in issuances of similar securities
  • the disclosure requirements cover but public issuances AND private (non-public) placements
  • the offering issuer must disclose the repurchase demand and repurchase and replacement activity concerning the asset pool on an ongoing basis in periodic reports

The MBA reports that the comment period for this rule ends on November 15, 2010.

The transparency requirements, relating to the disclosure, reporting and offering process for securitization, will greatly impact the commercial real estate industry (my prior posting on proposed disclosure rules released by the SEC in April 2010).

The MBA’s concern is well placed.

Is this "on" or "off" your radar?

As I’ve noted in in a prior posting, the informed borrower might have some angst about using technology for the public disclosure of loan level information – although (for example) you will be amazed at the amount of information available on CoStar and other databases built by the brokerage community.

But from the perspective of the lender or servicer handling distressed loans, technology will bring solutions to some very pressing problems.

This movement to use technology to solve points of pain in commercial real estate was foretold by a great white paper written by Joseph Rubin with E&Y.  (I’ve had this paper since 2005 – so it is a least 6 years old.)

This paper literally opened my eyes to "how" technology will impact commercial real estate.

Once you read Rubin’s white paper, you’ll have a deeper understanding and appreciation of the technology and transparency movement in commercial real estate, and an understanding that the SEC’s proposed rule on loan level information disclosure simply is an extension of Rubin’s paper (in addition to being responsive, in part, to investor demand for more and better information).

Indeed, the  push for common data standards (or "language" where a computer can transmit data to another computer without human involvement [referred to as  "B2B"]) through MISMO is closely related to the problems, concepts and solutions articulated by Rubin in his paper.

Sure, none of this directly addresses technology uses in CMBS special servicing, bank special asset work or distressed investments, but there currently are uses of technology that address the same or similar problems and solutions covered by Rubin.  Yes, technolgy helping to solve problems.

These technology tools include:

  • blogs (like this one) (training)
  • on-line libraries containing papers, speeches and other materials on distressed investments (like the Winstead resource materials site [look at the "client resources" tab at the top of this page]) (training)
  • legal collaboration sites, which collect or aggregate legal blogs, papers, etc. (such as LegalOnRamp and Martindale-Hubbell Connected) (training)
  • on-line, restricted access sites where companies and law firms post documents and information as data (like our VistaSync tool) (document collaboration; data collection)  (Note: I’ll be discussing our tool next Monday at a 4p panel presentation at the MBA Loan Servicing & Technology Conference)

If you have questions or comments, please post a comment below.

(When we attend industry conferences, we bring you along by blogging on topics of interest to us, with our comments of course. This is the second in a series of posting relating to, and from, the 2010 CMSA January Conference. [Link to first posting] Our blogs on other conferences are found [i] under the "Market Trends" category in the archives on the right side of the page, or [ii] by a word or phrase search on the right side of the page [suggested search terms: looking glass; scorecard; pond].)

It has been a very interesting day. The first session started at 11a and ended at 5:30p. As you’ll note below, the sessions covered a wide range of topics: from "how" investors may find loan level information to an update on financial reform from a US Senator.


Here are the highlights (with some commentary, of course).




This committee works on the reporting package furnished by loan servicers to CMBS bond holders. With the onset of this horrible CRE market, the bond holders have been complaining that the loan servicers are NOT giving them sufficient loan level information in the IRP. The IRP Committee is tasked to work on establishing best standards for the IRP. Consequently, it is an important committee, but appears to be stuck between the bond holders (who demand more information in the IRP) and the loan servicers (who anticipate changes in the CMBS model, and do not want to incur the costs of implementing new IRP content).  Hopefully, in the near future, the CMSA’s new "Forums" will give them much needed guidance for this important work.


With this background, here are the high lights of the IRP Committee meeting: 

  • the Committee has a working draft of an "Introductory Guide to the CMSA Investor Reporting Package (CMSA IRP), which will be posted on the CMSA website in the next 3-4 weeks. This guide is intended to help bond holders locate information. (Comment: It should be helpful. However, bond holders are seeking information outside of the scope of the IRP.)
  • the Committee is working on standards for disclosing indebtedness of borrower or of its owners (other than the first lien mortgage created for the benefit of the CMBS pool).
  • the Committee is forming a task force to indentify information required to be part of the IRP (pursuant to the typical Pooling and Servicing Agreement) but currently is NOT part of the IRP (Comment: if you’re a bond holder wanting more loan level information, then I suggest that you contact the CMSA and join this task force).

Note that the Committee appears to be on a brief hiatus, as it takes a pause pending guidance from the two member "Forums" described below.




In order to facilitate better communication within the CMSA between the various business interests, the CMSA is creating "forums." The Forums are intended to educate Forum members on topics important to the Forum, and also to advocate for the particular business interest within the CMSA, the larger industry and the larger political process. (Comment: this is a very, very wise move by the CMSA. It should avoid what some call "tranche warfare," which is where the senior bond holders assert that the special servicer is NOT taking action for the benefit of ALL classes of bond holders.)




Three examples were given of "where" the investment grade bond holder would benefit from a "forum" process that would focus on the following –

  • New investor-friendly practices for newly created CMBS issuances, such as these: out of money interest accrual should not prime principal; special servicing decisions must employ market rates of return; change of control should be based on realized losses plus appraisal reduction amounts; and much better loan-level disclosure can be delivered and are needed.
  • Loan resolution practices by special services, such as these: loan resolution policies and servicer reporting procedures that are in the best interest of investment grade bond holders (such as data transfers); what are special services doing, and why; and how can loan resolution practices of investment grade bond holders be implemented for legacy CMBS (Comment: one special servicer noted that his company has extended over 97% of all loan maturities. Thus, creating what he called an "extension pile-up.")
  • Selling REO with financing from the REMIC Trust, such as these: special servicers and the Real Estate Roundtable are advocating this before the US Treasury, without input by the investment grade bond holder; and could this change existing pooling and servicing agreements



The following was articulated as challenges facing CMBS loan servicers: 

  • Change from high growth (legacy CMBS model) to shrinking portfolios (in the absence of legacy CMBS model)
  • The impact of the current credit environment on special servicing operations (Comment: one servicer noted that they have extended @ 50% of loan maturity defaults if the borrower presents a viable plan.)
  • Address investor demands for more information and transparency. (Comment: pooling and servicing agreement requirements need to be examined, including sharing resolution business plans with investors.)
  • Future growth opportunities and challenges (Comment: one loan servicer commented that CMBS would NOT drive growth during the next 12-36 months.)
  • New servicing business models (Comment: one loan servicer commented that the "new" CMBS [referred to as "CMBS 2.0"] would look like loan syndications.)
  • Similarities and differences of different investors



This forum is for a broad band of CRE debt investors (such as B note holders, mezzanine lenders).

The meeting time was devoted to a survery of the 250+ people in the room. Here are some of the responses: 

  • 45% of the voters believe that CRE values will continue to fall in 2010 with no recovery in CRE values until 2011 (this fall is in addition to the 44% fall from 2007 CRE pricing)
  • with respect to the 2005-2008 CMBS pools, 37% of the voters believe that the average losses will be in the 11%-15% range (these loses will wipe out bond holder through the "AJ" class)
  • 43% of the voters believe that for CMBS loans liquidated in 2010, the average loss severity will be 40%-50% (and 27% believe that the average loss severity will be 50%-60%)
  • 69% of the voters believe that annual new CMBS issuances will not exceed $100B until 2013
  • for new CMBS issuances in 2010: 50% of the voters believe that issuances will be single borrower transactions; and 33% of the voters believe that issuances will be multi-borrower and large loan structures (with only a few assets); and
  • 58% of the voters believe that "old-school" multi-borrower, fixed rate deals will return no sooner than 2012 (or later)

In my next posting, I’ll cover the session titled "Lessons From CMBS 1.0: The Wonder Years" and then summarize some interesing comments made to us by Senator Bob Corker (R-Tenn), who is a member of the Senate Banking Committee.


If you have any questions or comments, please post your comment below.