Ruling turns up heat on CMBS appraisers

2014-10-11

NEW YORK, Oct 10 (IFR) - A recent UK court ruling shows that firms that inked faulty CMBS property valuations during the last real estate boom might be liable a decade later.

Colliers International last month was ordered to pay damages of EUR32m by the High Court in London based on a rosy EUR135m appraisal it supplied to lenders on a warehouse complex in Nuremberg, Germany.

That debt was pooled into a securitisation called Titan Europe 2006-3, which soured two years later. But after the court dug around and pegged the property's "true" value in 2005 atEUR103m, CMBS bondholders, for the first time ever, have become entitled to damages for the full amount of an appraiser's error.

"I don't know if there will be a new avalanche of claims to consider," said Helen Carty, a litigator at Clifford Chance in London. "But there was nothing unhelpful (in the Colliers ruling) for other claims."

MORE TO FOLLOW

Others that lost money in the CMBS market and are taking court action citing over-valuation of properties include bondholders exposed to a 2007-era EUR1.3bn Lehman Brothers CMBS called Windermere X and a GBP615m Gemini Eclipse 2006-3 deal from Barclays.

However, additional legal measures could stretch beyond Europe, with market players in the US already mulling the potential ramifications.

"We are monitoring the situation," said Ken Wilson, president of the Chicago-based Appraisal Institute, one of the nation's largest professional associations for appraising real estate. "As a general trend, it is of concern to appraisers."

For its part, Colliers said it regretted the court's decision, and noted that the valuation was undertaken by two former employees of Colliers UK in 2005, under the firm's prior ownership structure.

"We remain of the opinion that the property was correctly valued at the time and are pursuing an appeal," the firm said in a statement.

Even so, others say the sums of money at stake in what can be recouped from CMBS properties are too large to ignore.

James Walton, a partner at Rosling King, which advised Hatfield Philips International (one of the biggest special servicers of CMBS in Europe) on its case against Colliers, said the High Court ruling had "wide implications for other issuers and special servicers in the CMBS market", in a press release on the court's decision.

LOTS AT STAKE

In the US alone, some US$32.4bn in CMBS loans are in a serious stage of distress, either more than 90 days delinquent, in foreclosure, or already taken back by the lender and classified as "real estate owned," according to Trepp, a CMBS analytics provider.

And for loans already liquidated out of CMBS trusts the state of recoveries is far from pretty.

Between January and July, losses cut 49.32% off the original value of loans on average. And while commercial property values have risen overall, the latest loss numbers are still an uptick from the 43.88% hit taken on all CMBS loans liquidated since January 2010.

CRACKS IN THE PROCESS

Market participants say that faulty property estimates are not the sole cause of losses to bondholders on CMBS deals that tumbled in value after the real estate crash. Weak underwriting standards, too much leverage and tenants that became insolvent also hit values.

"It was symptomatic of property values going up and up, and people lending against those increased values," said Emma Matebalavu, a partner in Clifford Chance's real estate finance group. "In hindsight, that all came crashing down once values decreased."

But the process under which appraisers operate - namely being paid a fee per assignment, and often in a highly competitive environment where they vie against peers to win business - does not always produce the best outcome.

Shlomo Chopp, managing partner at Case Property Services, a distressed debt advisory firm in New York, said paltry fees might even be part of the problem.

"Appraisals are too much of a check-the-box process," he said. "If you go down to the nitty gritty of why does one building get better rents than another, there is a lot of work and time that goes into it."