T O S U C C E S S F U L LY R E S T R U C T U R I N G O R D E L E V E R A G I N G Y O U R C M B S L O A N

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PRESENTED BY:

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Ann HamblyPresident & CEO 1st Service Solutions

Commercial Real Estate AdvisorsCommercial real estate is no longer a relationship business. Owners often don’t have access to, or even know who the decision makers are on their loans. We provide advice and solutions for anything ranging from the addition or removal of collateral on an existing CMBS loan, to the most complex loan restructure for all loan types, nationwide. We create a strategy for the owner based on their specific objectives, including avoiding or delaying tax consequences and blend that with the expectations/requirements of the particular Lender/Special Servicer.

CMBS STRUCTURE

PARTIES IN A CMBS STRUCTURE

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EFFECT OF LOSSES ON SPECIAL SERVICERS

• Current CCR appoints special servicer

• Losses hit lowest tranches of bonds first

• As losses wipe out a class of bondholder, CCR changes

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Original Face Amount of Bond Losses Current Amount of

Bond

AAA 50 — 50

AA 20 — 20

A 10 5 5 (CCR)

BBB 10 10 0

B 6 6 0

UR 4 (CCR) 4 0

Example $100 pool

SPECIAL SERVICER

SERVICING STANDARDS

“Maximize return to all bondholders regardless of the special servicer’s own interest based on a net present value of all options available”

Options:

• Borrowers modification

• Foreclose and sell immediately

• Foreclose and sell within 3 years

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MODIFY OR FORECLOSE

What Factors into the Special Servicer’s Decision to Modify or Foreclose?

• Current value of the property – LTV

• Remaining term of the loan

• Will value recover to appropriate LTV by maturity date

• NPV of the foreclosure alternative

• Length of time to foreclose

• Cash flow versus advances

• Other considerations and costs 8

FMVPO

Fair Market Value Purchase Option

• Gives the CCR the right to buy a defaulted note out of the pool

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SPECIAL SERVICER DRIVERS

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What Matters to an Owner What Matters to the Special Servicer

Property Repositioning REMIC Rules

Remain in Control Liability to the Senior Bond Holders

Return of Investment The Status of their Bond Investment

Minimal Investment to Return to Performing NPV of all Options Available to them

FMVPO

CMBS MODIFICATION HISTORY

MODIFICATION VS. LIQUIDATION

Modification

• Loan stays in place

• No loss to bondholders

Liquidation

• Loan is “removed” from pool

• Loss to bondholders

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PERCENT CMBS UNIVERSE WITH MODIFICATION

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AVERAGE MONTHLY MODIFICATIONS:

Modifications per month:

• 2011 = 48

• 2012 = 32

• 2013 = 24

• 2014 = 7

• 2015 = 4

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Resolution Type Loan Count Original Balance ($Mil.)

DPO 47 1,086.9

Paid in Full 8 35

Note Sale 108 1,947.7

REO Liquidation 314 5,714.9

Writedown 1 12

Foreclosure 9 63.4

Repaid (Loss of Hope Note) 15 1,145.3

Total 502 10,005.2

2014 LIQUIDATIONS

Modifications Loan Count Original Balance ($Mil.)

Combination 44 2,181.8

Maturity Extension 10 230.4

Other 17 250.3

Amortization Change 8 65.4

Total 79 2,727.9

2014 MODIFICATIONS

BASIC KINDS OF MODIFICATIONS (RESTRUCTURES)

BASIC TYPES OF RESTRUCTURES

• Payment Modification

• Debt amount stays the same

• Debt Deferral

• Debt Forgiveness

• Maturity Date Extension

• Note Sale / FMVPO

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PAYMENT MODIFICATION

• Reduction of payment alone

• Typically for properties not under water

• Maturity extension can be granted

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• Reserves • Amortization • Interest • Principal • Taxes & Insurance

DEBT DEFERRAL

• Property under water today

• Some or all of value will be recovered by maturity date or extended maturity date

• A/B Structure

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SAMPLE OF A/B STRUCTURE (DEBT DEFERRAL)

• A = (as is) Appraisal Amount

• Payments made on A note can be I/O or amortizing

• Also can be reduced interest rate

• Capital = Borrower (or capital partner) provides TI-LC and all capital needs

• New capital can earn pref

• B Note = Hope Note

• Difference between A note and total loan

• Maturity date can be extended

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LIQUIDATION EVENT

Sale or refinance

1. A note payoff

2. Capital + Pref

3. Split of remainder until B note is paid off

4. Remainder of B note is written off

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DEBT FORGIVENESS

• Property is under water today

• Little to no value will be recovered by maturity date

• Can be executed through:

• Short sale

• Note sale

• Discounted payoff

• FMVPO

• Borrowers can partner with FMVPO buyers

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MATURITY DATE EXTENSION

• Performing loans only

• Borrower must make pay down at time of extension (Typically 10%)

• Cost = 1% per 12 month extension

• All PSA’s have outside date for extensions (Typically 2 - 3 years)

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APPRAISALS

ARA (APPRAISAL REDUCTION ACT)

What is it

• Proxy for expected losses to bondholders

• Basic formula –

principal balance of loan

+ trust expenses and advances

- Appraisal Amount

= ARA

What it is NOT

• The amount the special servicer will do a deal for25

OWNERS

WHAT A BORROWER NEEDS TO KNOW TO MODIFY THEIR LOAN

• Who the special servicer and the CCR are

• What the particular special servicer will entertain based on:

• Location of property

• Size of loan

• Maturity date

• Current value of property

• Their affiliate companies

• What the NPV of the other options available to the special servicer are, including advancing obligations

• How to present the request to increase the odds of acceptance

• How to keep the negotiation progressing even though it is one sided

• What the various requests made by the special servicer mean27

TOP 10 MUST HAVES

1. Know where the value of your property is today

2. Have a clear plan for the near-term and long-term of your property

3. Have new capital to put to use

4. Understand who you are negotiating with

5. Understand what their motivations are

6. Have a clear exit plan

7. Submit a clear, comprehensive road map of the value creation for your property

8. Be transparent

9. Be prepared to remit all your net cash flow throughout the process

10. Patience28

UPCOMING WEBINARS

2016 Series - EMPOWERING COMMERCIAL REAL ESTATE OWNERS WHO HAVE CMBS LOANS

• March 16th - WHY OIL AND CMBS LOANS DON’T MIX

• April 20th - HOW TO MODIFY A PERFORMING CMBS LOAN

• June 15th - THE STARTLING DIFFERENCES BETWEEN CMBS 1.0, 2.0 AND 3.0

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