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By Pariseur
October 30, 2009

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As I mentioned a week or so back we are all going to hear the term "special servicer" a lot more as the CMBS market implodes. It is going to be instructive to find out how well that special servicer process will work, but the onerous task of doing real estate a work out will be made harder by the servicer's need to respect the rights of many classes of investor, whose interests are in great conflict.

New York's Four Seasons Hotel and three other very top end hotels owned by Ty Warner Hotels & Resorts got their mortgage loan shipped to the Special Servicer about 11 days ago.

The $425 Million loan in default of its coverage ratio requirement was sent to a "special servicer" and S&P has placed it on "credit watch with negative implications." The loan would mature in January 2010 and a pension fund making a direct loan might well have extended it but --because the coverage required by the documents isn't there -- it could not be rolled over. The regular servicer seems to have had no choice but kick the can to the special servicer.

In addition to the Four Seasons, the properties include the Four Seasons Biltmore Resort in Montecito, the Las Ventanas in Cabo San Lucas, and the San Ysidro Ranch in Montecito. Average occupancy has dropped from 69% to 58% in the last two fiscal years. The 11% drop in occupancy, and pressure on average daily rate, triggered a 46% cut in NOI and all the alarms went off at the servicer. All four are genuinely 5 star properties and among the best in the world. Sooner or later it's hard to think they won't come back to supporting their loan, depending on your view of the economy it's probably within three to five years, but the threat of bankruptcy and the likely litigation likely means the lender's lack of flexibility is probably going to be costly.

The mess will almost certainly wreak havoc with their group sales effort. Imagine you are someone in charge of a professional group of neurosurgeons. You need good conventions to attract and keep members. Do you want to tell you board you want to book your convention in 2011 down in Cabo if you don't know whether the managers making you promises about how well you will be treated will still be there?

If there is a big chapter proceeding management's attention will be directed to hours and days and months with lawyers, not on filling rooms. Their sales staffs will be using the office Xerox machine to copy resumes as well as lists of prospective group clients they will promise to take across the street to a Ritz.

Wall Street was really persuasive over the last 20 years that "tranching" (slicing and dicing) these loans made the loans more valuable. As long as things went well the delicate carving was as elegant as the buffet chef at the Four Seasons.

With Halloween approaching, the slicing and dicing reminds us more of a Freddy movie sequel. It should be a blockbuster, for some time RealPoint has been saying there are $25 Billion in loans on 1,500 hotels that are in varying degrees of trouble already.