Master Servicers, Primary Servicers, Subservicers, and CMBS Loans
Unlike traditional bank loans, life insurance loans, and some agency loans, CMBS loans are not serviced by the lender who originally underwrote and originated the loan. CMBS loans are instead serviced by third-party entities referred to as master servicers. In many situations, the master servicer will assign the day-to-day servicing duties to another entity, known as a primary servicer. Sometimes, the primary servicer is referred to as a subservicer.
This is often the case when the master servicer is responsible for handling large pools of loans, and may not have the time or manpower to service all the loans themselves. In general, the primary servicer will need the master’s servicer’s approval for major issues or decisions.
For borrowers, interacting with master or primary servicers can be a challenge, as they are not obligated to assist the borrower if potential issues arise. Instead, they are obligated to help the CMBS investors obtain the promised annual percentage return on their commercial mortgage-backed securities. This means that customer service may not be ideal, and individual borrowers may not get the attention they want or deserve when dealing with issues regarding their loan.
The Responsibilities of CMBS Loan Servicers and Borrowers
The master servicer or primary servicer is responsible for communicating with the borrower through the term of the loan, collecting regular loan payments, and handling other borrower requests and inquiries. The borrower is typically responsible for sending required documentation, such as quarterly P&L (profit and loss) statements to the primary or servicer. The primary or master servicer may also hold replacement reserves for the loan in an escrow account should the property need emergency repairs or if the borrower falls behind on their loan payments. As noted below, servicers are generally responsible for approving both loan prepayments, such as yield maintenance or defeasance. They are also generally responsible for loan assumptions and a variety of other responsibilities.
General responsibilities of loan servicers, whether master or primary servicers, include:
Property inspections
Rent roll review
Lease review and recommendation
Lease approval
Easements approval
Partial releases of collateral
Loan assumption approval
Process of additional borrowing requests
Financial and legal covenant monitoring
Processing of transfer of equity interests
Rating agency approvals
CMSA data reporting
Tax reporting to the IRS
Insurance loss data processing
Cash management
Yield maintenance approval
Defeasance calculations
Payoff approval
Ground lease monitoring and payments
Approval of transfer of loan to special servicing
Special Servicers vs. Master Servicers vs. Primary Servicers
If a borrower defaults on their loan, servicing duties will generally be transferred from the primary or master servicer to a new type of servicer, referred to as a special servicer. Special servicers are responsible for determining the conditions of a potential loan workout.
Sometimes, a special servicer will allow for a loan workout, either temporarily suspending or reducing loan payments that can be paid back at a later time. However, if the property’s income has reached an unsustainably low level, they will generally take the borrower to court in an attempt to foreclose upon and repossess the property. If they do gain possession of the property, they may take steps to improve the property’s income, or they may sell it to provide compensation to the CMBS bondholders.
Unfortunately, some special servicers have developed a bad reputation for avoiding loan workouts, even when they are likely to work. This can occur when a special servicer wants to hold onto the property for their own investment purposes, which they are allowed to do, provided that the CMBS investors receive their promised return on investment. In fact, many special servicers have become major property owners as a result of foreclosures, which may be legal, but is considered somewhat unethical by many in the industry.