When a Borrower determines that putting additional capital into a Property doesn’t yield a market rate return on equity, and reputational risk is not a factor, a sponsor often decides to “stop the bleeding” and looks to turn over the Property to their Lender.  While most Borrowers hope to expedite the process and move on, it is imperative to diligently review the Loan documents BEFORE you start the transfer to understand any “carve-outs” that may trigger additional or ongoing liability. Here's what you need to know.

What's the Expiration Date?

Certain loan agreements do not state when a guarantor ceases to be liable for their “interest carry” and/or “operating carry" guaranty. There is no written language, or a sunset provision, for the guarantor’s financial obligations to expire. So, while a Borrower can transfer the property to the Lender, they may in fact remain liable for the interest and/or carry costs until such time as the property title is transferred to a third party. 

Are You Good?

Certain Borrower actions like fraudulent activity, creating waste, and/or filing bankruptcy will trigger levels of recourse. Your best recourse is to consult your Loan Documents.

Managing the Property and Reimbursements

Operating Expenses

Borrowers will need to continue to manage the Property until such time as a court-appointed Receiver is installed. Different states vary in judicious process and the rules governing receivership. For that interim period, Borrowers will need to negotiate to get a Lender to reimburse the property's operating expenses. If successful, an Accounts Payable Aging Report along with proof of paid invoices must be submitted to ensure reimbursement.

Management Fees and Commissions

If a third party currently manages the property, a management fee is considered a reimbursable expense, but if an affiliate of ownership manages the property, the expense may or may not be reimbursable. The Assignment of the Management and Subordination of Management Fees Agreement must detail explicitly that an “affiliate management company” has the right to collect management fees after a loan default; otherwise, the Borrower's affiliate will not be reimbursed for management fees. Additionally, leasing commissions to in-house brokers generally will not be reimbursed after a default event, while an outside broker will be reimbursed for commissions earned. 

Back-Dated Expenses

In specific circumstances, a Lender may reimburse a Borrower for back-dated expenses when a Borrower carries the Property in good faith for an extended period. Furthermore, insurance expenses may be reimbursed for the pro-rata portion of the unused, insurance premium the Borrower paid before the Lender takes title.  

About The Henley Group

We are expert CMBS Borrower Advocates with extensive experience partnering with clients to catalyze loan resolutions. Dedicated to service excellence and outstanding outcomes, we have worked out over $12 billion in CMBS deals to date. We are proud of the deep relationships The Henley Group has forged with Special Servicers for 15 years. Our unique skill set, patient negotiating style, and understanding of Special Servicing allow us to get results that may not be available to you.