9.29.14: Franchise Expirations an Issue for CMBS Conduit Loans

The buyers of the most risky bonds in the CMBS structure (commonly referred to as the b-buyer) have the right to review all the loans in a CMBS pool in which they buy the bonds in the riskiest position. As part of the review, the b-buyer has the opportunity to “kick-out” of the pool or request price adjustments for a limited number of loans they are not comfortable with in the pool. As a result, loan originators are acutely focused on making sure loans closed are well underwritten to avoid the potential for a kick-out or price adjustment.

Given that hospitality is generally considered riskier than other commercial assets, hotel loans get much scrutiny. Recently, b-buyers have increased their scrutiny of franchise expiration dates for franchised limited- and full-service hotels. Data have supported that the probability of default is high and cash recovery amounts are low from foreclosed hotels that have lost their franchises. Therefore, b-buyers have concerns for franchised hotels that have less than five years remaining in their franchise agreements and those agreements that have cancellation rights within a five-year window. They are actively kicking those loans out.

Previously, as long as the loan was structured with a Property Improvement Plan (PIP) reserve, either at closing or over time such that the reserve accumulated to $7,500/room (roughly $500,000 on a typical 65- to 70-room limited-service hotel) prior to the franchise expiration, b-buyers were satisfied. However, many older franchised properties are not being renewed at all, making the reserves somewhat useless as alternative franchises are often not available in the market.

“Now we either have to get early renewals or show that the property is consistent with current brand standards in order to get deals done with franchise expirations less than five years away,” commented Jay Bhakta, a senior loan originator at the ValueXpress Jackson, Mississippi office.


This entry was posted in CMBS, CMBS Securities, Commercial Mortgage-Backed Securities, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , , , . Bookmark the permalink.

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