What happens to the SECURITY (or the special servicer) when a CMBS borrower defaults?
I'm trying to google the answer but everything is borrower-focused.

I am curious to know what the special servicer does when, let's say, the borrower is completely bankrupt or hypothetically him and his LLC just completely vanishes from the face of the earth. I've read the special servicer then can take over the property? Does the special servicer have to manage the property to produce the cash flows necessary to provide the investor returns?

As for the actual security, is there any scenario where the investor is just SOL because the security's underlying property no longer generates any cash flow? Does the security just become worthless, or does it disappear?
[{"id": "fy6mxfj", "text": "I'm also curious about this. I think the special servicer at some stage will have to sell the collateral to repay the debt basis right?", "replies": [{"id": "fy6pb1e", "text": "No, the servicer can\u2019t do anything without the operating advisors approval. The OA could hold it I definately if they want to (well as long as the indenture allows). I\u2019ve held stuff in servicing way past it\u2019s prime because a sale would have dropped me below the 25% of UPB left in the tranche which would have kicked control over to the owner of the next tranche up the capital stack.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fy6neja", "text": "I believe the SSP is there strictly on the lender\u2019s behalf. Imo I don\u2019t believe the SSP has any equity or skin in the game. \n\nOf a loan goes to SSP and the lender either takes back the property and or sells it, they liquidate to recover any losses. If any extra, would technically go back to the borrower.", "replies": [{"id": "fy6ps35", "text": "The SSP is 100% working for the operating advisor. All they get are fees (and a ton of them!). They have no skin in the game, and any proceeds from a sale will go to pay the top tranche of the CMBS trust and any realized losses will write down the position of the bottom tranche (the operating advisor). One weird exception is this thing called an ASER (appraisal subordinate entitlement reduction) in which the OA recognizes a loss on their position prior to the sale due to an appraisal reducing the value of the defaulted collateral. If the price the property sells for is greater than the amount of the mark down the bottom tranche will actually recognize a gain (for no other reason than they already recognized a loss greater than they actually incurred earlier)", "replies": [], "depth": 2}, {"id": "fyd58su", "text": "Sometimes the special servicer and CCR are the same company, so the SS technically does have skin in the game. Additionally, that group is the risk retention holder a lot of times. If the property gets foreclosed on, and the servicer is able to sell it for more than the UPB, the extra would not go back to the borrower. They have been foreclosed out and are not involved in the deal anymore. Money would go to the trust and servicer.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fy6nexm", "text": "The operating advisor (OA) owns the majority of the controlling class of the security. They will direct the servicer to put a receiver in place who is appointed by the court - the receiver works for the court though and is really just there to make sure the original borrower doesn\u2019t keep taking money out. This 100% shuts off the borrower from doing anything. Once this is done, the OA can choose to either exercise a Fair Market Value (FMV) option and purchase the note at a discount from the CMBS trust. The OA will work with the servicer to determine a price for the loan; if they get to an agreement the loan sale will then require sign off from the master servicer. \n\nIf the OA elects not to exercise an FMV the servicer will move to foreclose. At that point the servicer will look to maximize recovery. If there\u2019s any capex need they\u2019ll probably just auction it (but at the OAs direction) because the Master won\u2019t advance anymore capital. Once the servicer has taken title 99% of the time the property will be sold via an auction platform like ten-x shortly after taking title. Name of the game after foreclosure is minimizing exposure (servicer fees, legal, default interest advanced by the master etc) as every dollar spent by the SS is a dollar of loss to the OA. Sell it quick! \n\nLet me know if I can clarify anything, have spent a ton of time buying CMBS 1.0 to flip the underlying collateral to make $$$\n\nEdit - also you asked about the underlying security, the trust takes title to it when they foreclose. The title is still held by the original sponsor until that happens.\n\nEdit 2 - also yea you\u2019re shit out of luck if the losses on the entire CMBS stack exceed your last dollar basis on your tranche. The security itself goes away and your money is gone.", "replies": [{"id": "fy6wt2s", "text": "Using the term \"operating advisor\" is misleading because in CMBS 2.0 the \"operating advisor\" is a completely separate party to the securitization, who does not own a part of any class of the deal. The party you are referring to is most commonly called the \"B-piece buyer\" (or \"holder\" after it trades in the secondary). Although if you want to get really technical, because of write-downs and ARAs the controlling note could in theory no longer be the B-piece - common in CMBS 1.0 but not in 2.0 yet - so in legalese it's the \"Controlling Class Representative\".", "replies": [{"id": "fy70jnj", "text": "You are correct, it is CCR now my apologies. my CMBS experience is primarily 1.0 control class purchase and workout, my 2.0 B note investments have been all GSE debt - default free so far!!!", "replies": [{"id": "fyd3omj", "text": "I think it\u2019s also important to note that, at least in conduit cmbs deals, the CCR and the special servicers are the same company a lot of times. Different groups have different strategies as well. Some will try to keep the loans in special servicing for as long as possible and milk those fees, while others try to get to the real estate as quickly as possible, with the intent of turning the asset around or selling.", "replies": [{"id": "fydbrk6", "text": "Not really, CW Capital is owned by Fortress who was only doing FMVs on the 1.0 stuff and not buying B notes, LNR is a Starwood product doing the same but with a big B note platform, and CIII is island who I believe is running it as pure play servicer. The other services like Key are just doing it for fees and don\u2019t think they have a huge B note book but I could be wrong. Unless your FIG / Starwood with control of a servicer the CCR is likely different", "replies": [{"id": "fydzh2l", "text": "True, I guess the majority are third party special servicers, but it\u2019s not that uncommon for the CCR and special servicer to be related. Rialto has been one of the biggest b-piece buyers over the last few years and has a special servicing platform, like LNR. Ciii\u2019s special servicing platform was recently sold to Greystone, but I don\u2019t think greystone is an active b-piece buyer. There are some smaller groups that are both b-piece buyers and special servicers, though - 3650 reit for example.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fy98trz", "text": "This is a broad, somewhat ignorant question, but could help me understand the dynamics of the appraisal during a workout situation from the bondholder's point of view?  I think something triggers with regards to the CCH's rights if the appraised value drops too fast.  Is this a thing?", "replies": [{"id": "fy9kh8g", "text": "Yea, once the UPB of the controlling class drops below ~25% of the original tranche control flips to the next highest tranche. The ASER mark down would correct for this so that the controlling class isn\u2019t holding on to stuff by its fingernails to maintain control while possibly making the situation worse for other bond holders upstairs.", "replies": [], "depth": 3}], "depth": 2}, {"id": "fyd84u8", "text": "I\u2019m curious to hear your thoughts on what the next year will look like for CMBS \u201copportunities?\u201d", "replies": [], "depth": 2}], "depth": 1}, {"id": "fy7caik", "text": "I worked for a company that bundled commercial loans into CMBS and CDO products.  In layman\u2019s terms, they would bundle thousands of loans and sell tranches of the bundle (CMBS or CDO) with each tranche paying interest commensurate to the risk level being purchased. The top tranche gets the highest interest but absorbs the first defaults.  The next tranche gets less interest but doesn\u2019t take losses until the tranche above it absorbs their share of defaults.  This continues until you get to the last tranche which is owned by the special servicer.  The special servicer only gets involved once the normal servicer can\u2019t get the borrower to pay.  In its role, the special servicer can work on extensions, modifications, or simply foreclose and manage the property.  We had many asset managers whose job was to manage properties until buyers could be found or new financing was made available.  Our company made lot of money into the 2008 financial crisis originating and bundling these loans and again after the crisis as the special servicer on all those loans they bundled.", "replies": [{"id": "fy7w0lw", "text": "What does \"absorb their share of defaults\" mean if the property just can't pay anything out anymore? Don't all the tranches just get equally nothing?\n\nAlso, are there CMBS \"bundles\" of only one property?", "replies": [{"id": "fy8p785", "text": "Let\u2019s say that you buy one commercial loan. There is an inherent risk of default which you are accepting with that one loan.  Let\u2019s say that you want to sell commercial loans to a pension fund and are prohibited from owning risky loans.  By bundling 1,000 risky loans together you minimize the impact of any one loan defaulting.  If you split that bundle so that your capital is only at risk once 90% of the loans have defaulted, then the likely hood of that happening is close to zero.  You take that tranche to a rating agency and get their blessing and receive a AAA rating. Now that tranche can be sold to the pension funds.  So having only one loan defeats the purpose.", "replies": [{"id": "fy9dbqa", "text": "&gt;e that tranche to a rating agency and get their bless\n\nSlowlypassingtime - ***In no way am I trying to be provocative***...\n\nSo by taking a fraction of a lot of \"Risky Loans\" will compute to a \"AAA\" rating.  If economic failure occurs (defined as defaults of the Tranche products)  it will happen exponentially  (the funds are related to each other as mrjackdess pointed out - \"absorbs their share of the defaults\").   It gives the sophisticated seller a way to sell these \"AAA\" groups of \"1000 Risky loans\"  to offer a high return product to Pension Fund buyers.  Saying that, defaults in the \"1000 Risky Loans\" pool will be ***leading*** an economic downturn.  \n\n*So - a rating Agency would still brand Risky Loans as \"AAA\" because there are a lot of them compared to a similar large group of loans that would stand as \"AAA\" on their own?  - that doesn't compute.*\n\n((Referring to the Hollywood movie\" Big Short\" it showed a fictional dialog with a Ratings Agency in 2008, where one Ratings Agency said that if they don't meet the Rating request, the requester will just go to another Ratings Agency.   This implies the system regulators can't or won't do relative mathematics and reasoning.)) \n\nHow could I - some dumb hack, be smarter than than the Pension Fund Buyers that say \"well it has (had) a AAA rating\".  Sheesh they must be desperate, but wonderful targets.  I want to work in your company, how do I get that job?\n\n^(Again - I will take this down or edit if it is antagonistic, that is not the intent.  (Have a minors in Advanced Physics and Mathematics))", "replies": [{"id": "fy9fz98", "text": "It\u2019s very much like what they show in the Big Short, but commercial loans instead of residential loans.  The math works in an academic sense, but in reality, it allows more low risk capital to chase high risk subprime loans which eventually catches up to us.", "replies": [{"id": "fyk91hp", "text": "\"Our company made lot of money into the 2008 financial crisis originating and bundling these loans and again after the crisis as the special servicer on all those loans they bundled. \"\n\nThe movie Big Short depicted your company bad (for lack of a better word).", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "fy9kt83", "text": "There is single issuance CMBS... some large individual loans have been securitized this way. FNMA also does single issuance CMBS", "replies": [{"id": "fy9qg9d", "text": "I didn\u2019t know that. Thank you for sharing.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fyd8ujv", "text": "There are single asset deals. They are know as SASB (single asset single borrower). Pronounced \u201csazbee\u201d. Usually large office buildings, hotels, etc that have a loan of $100MM+. Bellagio is a recent example of one.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fye0rj9", "text": "The special servicer can and will take title to the property in that case. Sometimes they will operate the property and try to stabilize it or will sell as quickly as possible. If the property sells for less than the UPB, it results in a loss for the bond holders. Small losses are generally expected. Small losses won\u2019t effect the AAA tranche, but will impact the returns for the riskier tranches.", "replies": [], "depth": 1}, {"id": "fz5he6r", "text": "https://youtu.be/3hG4X5iTK8M\n\nbest explaination to date", "replies": [], "depth": 1}]