New financing options mean buyers
need their lawyers like never before

If your clients are planning to use Commercial Mortgage Backed Securities to purchase real estate, they are going to need you to help point out the difference between these loan packages and traditional financing, initially and throughout the life of the loan.

A recent CLE program, “Securitized Loans: A Primer for Real Estate Lawyers,” offered pointers about structure, restrictions and exit strategies in helping clients navigate the CMBS landscape.

Use of CMBS to finance a real estate transaction has become popular in the past 20 years. During the 1980s banks began packaging consumer mortgages and selling the bundled mortgages to investors. The practice was adopted in the commercial real estate market in the 1990s.

Unlike the traditional process where a borrower goes to a mortgage banker or broker to secure financing, which was then sold to the ultimate lender, a commercial bank or life insurance company, a borrower under CMBS works with first a mortgage broker, then a loan originator, followed by a depositor who forms a trust, and then a trustee. Along the way are requirements for appraisals, financial statements, engineering reports and rating agencies.

Linda A. Striefsky, partner in the real estate practice group of Thompson Hine LLP in the firm’s Cleveland office, led the panel. She explained that under CMBS, the loan originator is also a seller who pools several loans based on similarities in maturity and risk classes into a trust, a Real Estate Mortgage Investment Conduit. “That trust will issue certificates to investors who then have the benefit of certificates backed by the mortgages,” she said.

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The challenge for buyers is that they must be single purpose/bankruptcy remote entities, meet REMIC requirements, have an exit strategy and follow guidelines for reporting, reserves and cash management.

Panelist Marci P. Schmerler, also a partner in the real estate practice group of Thompson Hine and head of the real estate practice in the firm’s Atlanta office, noted that being a single purpose/bankruptcy remote borrower means that the borrower must be structured with a single purpose and its purpose is to have that loan. This single asset is set up to avoid its own insolvency and is insulated from the insolvency of others.

Additionally, she noted, “the lender is trying to make bankruptcy remote because certificate holders only want to evaluate the loan and collateral, not the buyer.”

Panelist Robert C. Hayn, who serves as an associate general counsel in the investment management law division of TIAA-CREF, says that not all bundled loans qualify for REMIC status. “Under the REMIC rules a loan can’t be in default, there has to be an ascertainable interest rate, the loan has to have the potential for being secured by securities such as treasury certificates, provides for no further advances and is in a pool of static loans.”

Panelists agreed that the REMIC requirements can cause problems unless clients plan. For example, your client might use REMIC loans to cover original project financing for a shopping center. If a year or so later, a retailer wants to put up a store on an out-parcel, the client cannot apply for refinancing of the existing loan. The client has to secure new funding, unless he or she anticipated the need for additional financing and had provisions for additional financing written into the original agreement.

As a lawyer, you can help your client plan for such eventualities. You can also help your client plan an exit strategy, which involves paying off the loan and satisfying the REMIC requirements at the same time.

Because the trust needs to be maintained, if your client wants to pay off the mortgage loan early, he or she may have to purchase a treasury bond that pays the same amount to the trust as the mortgage interest. Again, you will want to discuss exit strategies with your client as you are setting up the CMBS loan.

A recoding of the CLE, “Securitized Loans: A Primer for Real Estate Lawyers,” with handouts is available online. For course materials, click here. To purchase the CLE at the ABA Webstore, click here.

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