In March 2017, I wrote an article titled "7 Things that Kill a CMBS Assumption". They were as follows:
1. Loan to Purchase Price 2. Increase in Reserves 3. Non-Recourse Carve-Out Guarantors – minimum net worth requirements 4. Controlling Class Representative (CCR) – higher level of involvement 5. Foreign Buyers 6. Crowdfunding 7. Cash Management – required more often
Now let's take a look at the top things that kill a CMBS assumption in 2024:
Loan to Purchase Price is not currently an issue. In 2017, the servicers often required the buyer to establish a reserve for the difference between the LTV at the origination of the loan and the LTV at the time of purchase. The only time there is an issue with the purchase price is when it is below the debt. It is difficult, but not impossible, to get an assumption approved on deals where the current value of the property is less than the loan.
An increase in Reserves is not currently an issue. We personally think that many buyers are now just aware of the fact that the adequacy of reserves will be reviewed during the assumption approval process. That's why it doesn't kill deals today.
Non-Recourse Carve-Out Guarantors – minimum net worth requirements are only an issue today because buyers often do not realize that most CMBS loan documents now have a stated minimum net worth and liquidity requirement that must be met at the time of an assumption. The first thing a buyer and/or broker should do when a buyer is selected is to confirm that the buyer meets the minimum requirements. If not, the deal will likely not be approved.
Controlling Class Representative (CCR) – higher level of involvement is not currently an issue. CCR's do maintain an active role in the approval of an assumption, but their involvement is not a surprise to anyone in the CMBS business. Just know that the deal is not officially approved until CCR approval is obtained.
Foreign Buyers are still a concern in 2024. They must have real estate assets in the United States to qualify. We are not aware of a way around this.
Crowdfunding is still a concern in 2024. A guarantor, sponsor, and anyone in a position of control over the asset must have at least 10% ownership in the organizational structure. This ownership interest must also be in the form of cash contribution rather than "sweat equity".
Cash Management – required more often is still a concern in 2024. Where this most often kills deals is when the property being purchased is in a cash sweep, which means that the excess cash flow after payment of the debt service, reserves, and operating expenses is held by the lender. So many of the cash sweeps in place today were triggered by an event where a cure is not evident; meaning there isn't a clear way to get out of cash sweep anytime soon. This results in no return on the investment for the buyer. We have seen many PSAs include a provision that the buyer must get out of cash sweep at the time of assumption, or the deal is off. Know ahead of time that it is near impossible to get a lender or servicer to give up their cash sweep rights.
To recap, there are currently only 3 main ways to kill a CMBS assumption in 2024, other than a lack of knowledge of the above of course:
1. Foreign buyer with no US real estate assets 2. Organizational structure where anyone with control rights on the property does not have at least a 10% cash ownership in the property 3. The loan is currently in cash sweep with no clear way out. An example of this is Walgreens, where the debt rating of the pharmacy giant caused all of its CMBS loans to be in cash sweep. Without an upgrade to Walgreens credit, a cash sweep is not possible.
Ann Hambly is the founder and CEO of 1st Service Solutions, a debt advisory firm for CMBS debt.