How is Commercial Real Estate Getting Done. These Guys Know!

FEWER TRANSACTIONS PRODUCE VALUATION UNCERTAINTIES -
Values are going to be a slippery slope for probably the next 24 months until real sales get out there in the market to provide some (comparables)," said Paul Smyth, president of Centerline Servicing LLC, Irving, Texas.

Speaking recently at the Mortgage Bankers Associations Commercial/Multifamily Servicing and Technology Conference, Smyth said fewer current comparables and distressed sale comparables drive significant valuation differences in appraisals—some set even one week apart.

"Alot of it is subjective. You really don't know in a lot of cases until you are actually exposed to the market," Smyth said.

While appraisals remain unreliable, borrower special request volume at Berkadia Commercial Mortgage LLC, Horsham, Pa., increased by nearly four-fold after last year, said Mark McCool, executive vice president.

"Our CMBS (delinquencies) continue to creep up; therefore, our appraisal needs continue to creep up. They remain as unreliable as they ever have been, probably more so at this point," McCool said. "It is incredibly difficult to think from a valuation perspective from the appraisals. It is incredibly difficult."
"Appraisers are having trouble getting their arms around value when there are only so many comps," said Steven Smith, president and COO at PNC Real Estate/Midland Loan Services Inc., Overland Park, Kan. "Appraisals are, by nature, a backward looking exercise, and there are just not many data points for appraisers to settle on."

Smith said assumptions are "a little too aggressive" on recovery amount; PNC/Midland does not agree on stabilized value. It will rely on broker opinion value and, based on the market, PNC/Midland will develop its own value.

Some feedback within the CMBS capital stack showed investors within the stack disagree with the appraisals, Smith added. "We try to do what is best for all certificate holders in the trust," he said. "It is not always a clear deposition and you just don't make everybody happy."

In 2007, Midland completed five modications; four in 2008; 50 modifications in 2009 and 53 modifications year-to-date. However, pressure continues to mount for servicers. "Even though it ebbs and flows, there is an average 300 questions a month from ratings agencies," Smyth said.

Centerline assigns a special asset group for government-sponsored enterprises and a special, separate group in CMBS, Smyth said. With critical mass in special servicing, Centerline subdivides areas trying to keep 15 loans per asset manager, different from the Resolution Trust Corp., which handled north of 100 during the early 1990s.

Smith said PNC's Midland expects questions on special servicing issues to double this year; and the servicer started tracking those queries last year.

"We are seeing a pretty healthy increase in questions come in related to maturities, related to tenant issues, whether they are tenant rollovers or lease renewals or just basic questions—very detailed questions—about lease information," Smith said. "We can expect questions about the watchlist, delinquencies and ARDs (anticipated repayment dates)."

Greater scrutiny also necessitates other analysis for valuation besides the appraisal, Smyth said.
"It's like working out loans in the Roman arena now because the whole world is watching you," Smyth said. "It's a very different arena to work out loans and the credit values are not the only value."


Brad Cox, CCIM, CPM
Email: bcox@tdwood.com