A recent article in the Wall Street Journal* placed a spotlight on the role of “middlemen”, or special servicers as they are known in the CMBS loan marketplace. It described how high profile investors such as Andrew Farkas and his Island Capital Group recently bought special servicer C-III, and how Fortress Investment Group, which purchased CW Capital, are seeking to profit by purchasing these special servicers, thereby getting a “front row seat,” to distressed commercial real estate assets sold at auction, a scenario that many view as replete with conflict of interest issues.
CMBS loans are securities backed by pools of commercial real estate mortgages and which are administered by master servicers. When a CMBS loan goes into default, the master servicer passes the loan to a special servicer, which is charged with working out loans on behalf of the investors who bought the bonds. On the one hand, the special servicers are supposed to represent the interests of the bondholders. On the other, the same special servicers have the right to buy the distressed asset as long as they pay a fair market value. Hence, the conflict. While the article goes on to focus on conflicts within the CMBS investment marketplace, the impact will be felt by CMBS borrowers as well.
