Real Estate partner Daniel Huffenus spoke to the Charlotte Business Journal about what options are available for borrowers and special servicers when a commercial mortgage-backed security loan is in default.

In the context of a defaulted $85 million loan on the EpiCentre, a dining and entertainment hub in Charlotte, which is held in a portfolio of similar property mortgages that have been sold off in shares (commercial mortgage-backed securities) to investors, Dan explained that when a loan is in default, the special servicer should take over.

"They're charged with finding a resolution that's in the best interest of all certificate holders. They have to then work out the loan. They'll look at it and decide whether it makes sense to do some sort of forbearance or reduce the debt, take a hope note or take the property," Dan said.

In uncertain times, such as during the COVID-19 pandemic, lenders in the current real estate market are more willing to work with borrowers, regardless of the choice servicers make. However, Dan also explained that if a property has potential rental growth, a servicer might decide to take the property and operate it themselves. As an alternative, the servicer  may  choose to market the promissory note to active real estate investors looking for a distressed opportunity with an upside component, whether that be increasing current rents or repositioning the property use altogether.   

EpiCentre property loan sent to special servicing because of 'imminent monetary default.'