Outcomes and Lessons:

Modification Now Makes Sale or Refinance Viable Later

A recent CMS client, a 25-member Tenants-In-Common (TIC) group, owned a 250-unit multi-family facility in the Southeast. With a mortgage balance of $14 million in the form of a CMBS loan, an interest rate of 5.75%, interest-only payments and a maturity date of June 2012, the property was experiencing negative cash flow as it attempted to weather this difficult economy.

Owner Objectives:
1. Eliminate the need to continue to infuse cash into the property.
2. Obtain a long-term solution that would allow the TIC to weather the current economic environment.
3. Obtain a solution that would require a minimum of cash outlay.
4. Maintain control of the property to be in position to experience the upturn in value as the marketplace improves.

Potential Alternatives:
1. Sale: Since the property value approximated the outstanding mortgage amount, the owners would lose their investment.
2. Refinance: A new lender would require 75% LTV, resulting in a 25% shortfall to be funded by ownership.
3. Modification: This would require significantly less capital and create a longer time frame to weather the economic environment and correct current financial / operational issues.

1.  Modification was determined to be the best choice.
2.  No capital infusions were required during the modification process.
3.  Long term solution: The maturity date was extended to June 2014 (with 4.75% interest-only payments), and
4.  The special servicer provided two, 1-year options to extend beyond the June 2014 maturity (with 5.75% interest-only payments).
5.  In addition, $1.1 million in past due payments, late fees, and default interest were deferred or waived.
6.  The total solution cost ownership less than 5% of the mortgage balance to effectuate, which included all lender, legal, and third party fees.
7.  As a result, both the Sale and Refinance alternatives will be more viable in the future.

The key was to obtain consensus on objectives and commitment at the outset. While always important, it is particularly so in a TIC environment as widespread consensus must be achieved.

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