CNSREIT-AR-2024 Final - Flipbook - Page 58
There are certain risks associated with the servicers of commercial real estate loans underlying CMBS and other
investments.
The exercise of remedies and successful realization of liquidation proceeds relating to commercial real estate loans
underlying CMBS and other investments may depend on the performance of the servicer or special servicer. The servicer
may not be appropriately staffed or compensated to immediately address issues or concerns with the underlying loans.
Such servicers may exit the business and need to be replaced, which could have a negative impact on the portfolio due to
lack of focus during a transition. Special servicers frequently are affiliated with investors who have purchased the most
subordinate bond classes, and certain servicing actions, such as a loan extension instead of forcing a borrower pay off, may
benefit the subordinate bond classes more so than the senior bonds. While servicers are obligated to service the portfolio
subject to a servicing standard and maximize the present value of the loans for all bond classes, servicers with an affiliate
investment in the CMBS or other investments may have a conflict of interest. There may be a limited number of special
servicers available, particularly those which do not have conflicts of interest. In addition, to the extent any such servicers
fail to effectively perform their obligations pursuant to the applicable servicing agreements, such failure may adversely
affect our investments.
We may invest in commercial mortgage loans which are non-recourse in nature and include limited options for
financial recovery in the event of default; an event of default may adversely affect our results of operations and
financial condition.
We may invest from time to time in commercial mortgage loans, including mezzanine loans and B-notes, which are
secured by residential, commercial or other properties and are subject to risks of delinquency and foreclosure and risks of
loss. Commercial real estate loans are generally not fully amortizing, which means that they may have a significant
principal balance or balloon payment due on maturity. Full satisfaction of the balloon payment by a commercial borrower
depends on the availability of subsequent financing or a functioning sales market, as well as other factors such as the value
of the property, the level of prevailing mortgage rates, the borrower9s equity in the property and the financial condition and
operating history of the property and the borrower. In certain situations, and during periods of credit distress, the
unavailability of real estate financing may lead to default by a commercial borrower. In addition, in the absence of any such
takeout financing, the ability of a borrower to repay a loan secured by an income-producing property will depend upon the
successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the
net operating income of the property is reduced, the borrower9s ability to repay the loan may be impaired.
Furthermore, we may not have the same access to information in connection with investments in commercial mortgage
loans, either when investigating a potential investment or after making an investment, as compared to publicly traded
securities.
Commercial mortgage loans are usually non-recourse in nature. Therefore, when a commercial borrower defaults on
the commercial mortgage loan, the options for financial recovery are limited. To the extent the underlying default rates
with respect to the pool or tranche of commercial real estate loans in which we directly or indirectly invest increase, the
performance of our investments related thereto may be adversely affected. Default rates and losses on commercial
mortgage loans will be affected by a number of factors, including global, regional and local economic conditions in the
area where the mortgage properties are located, the borrower9s equity in the mortgage property, the financial circumstances
of the borrower, tenant mix and tenant bankruptcies, property management decisions, including with respect to capital
improvements, property location and condition, competition from other properties offering the same or similar services,
environmental conditions, real estate tax rates, tax credits and other operating expenses, governmental rules, regulations
and fiscal policies, acts of god, terrorism, social unrest and civil disturbances. A decline in specific commercial real estate
markets and property valuations may result in higher delinquencies and defaults and potentially foreclosures. In the event
of default, the lender will have no right to assets beyond collateral attached to the commercial mortgage loan.
In the event of any default under a mortgage or real estate loan held directly by us, we will bear a risk of loss of
principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the
mortgage or real estate loan, which could have a material adverse effect on our profitability. In the event of the bankruptcy
of a mortgage or real estate loan borrower, the mortgage or real estate loan to such borrower will be deemed to be secured
only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy
court), and the lien securing the mortgage or real estate loan will be subject to the avoidance powers of the bankruptcy
trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Additionally, in the event of a default
under any senior debt, the junior or subordinate lender generally forecloses on the equity, purchases the senior debt or
negotiates a forbearance or restructuring arrangement with the senior lender in order to preserve its collateral.
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