Aftermath of World Trade Center Tragedy Tests CMBS Servicing Industry.(Commercial Mortgage Backed Securities)

When terrorists destroyed the World Trade Center complex - a symbolic, bustling hive of capitalism that had over 10 million square feet of commercial office space, as well as retail space - a little over two years ago, it was a watershed event in the course of the fledgling commercial real estate securitization market. One unexpected consequence was that, as the lender and servicer on a $563 million mortgage loan backed by WTC buildings 1, 2, 4 and 5 that was securitized into the commercial mortgage-backed securities market, GMAC Commercial Mortgage found itself caught up in a complex situation. The Horsham, Pa.-based commercial mortgage lender has finally got out of its predicament by getting investors in the CMBS securities to agree to a prepayment on the securities after the lender was paid off recently by Larry Silverstein. The New York City developer bought a 99-year leasehold interest on the WTC office space, partly funded by the General Motors subsidiary, the summer before the Sept. 11, 2001 destruction of the property.

The assignment has certainly brought to the fore the role played by servicers in commercial mortgage transactions. If the payoff had not occurred at this juncture, the bondholders might well have found themselves invested in a construction loan, which is considered riskier, rather than a commercial mortgage loan.

David Creamer, chairman of GMACCM, declares himself pleased to be able to bring the transaction to a successful conclusion. Responding to some questions posed by MSN, Mr. Creamer noted, "The destruction of the World Trade Center towers was, of course, unprecedented and tragic, and the resulting situation raised servicing and legal issues more complex than we ordinarily encounter. Due to the uncertainty of the situation, we took a proactive approach both in enforcing the rights of the certificate holders and in keeping certificate holders informed of developments."

One key takeaway from the experience for GMACCM is that they have learned not to close another large loan without having an actual insurance policy - rather than just a binder - in hand. Other than that, the servicer would "stand by all the actions we took in this transaction." Roy Chun, director of surveillance with the Standard & Poor's CMBS group, also stressed the importance of having an insurance certificate on hand, noting that "the servicer should know what will happen if something happens to the property." He believes that GMACCM did what they had to do in working with all the parties ...