Current state of CMBS offerings and main concerns

BBacked by the basic policy “that housing is for residing, not for speculating”, real estate financing has become increasingly tight. Considering the advantages such as long terms, relatively low financing costs, low repayments over the period, flexibility in the use of the product, etc., Commercial Mortgage Backed Securities (CMBS) attract more and more market attention.

Chen Xiuli
V&T law firm

Current status of the offer

CN-ABS data shows that as of September 30, 2021, a total of 212 CMBS products have been successfully sold in China, generating a total product of 453.6 billion RMB ($ 70.5 billion), the number and the size of offerings maintaining an annual growth trend since the first CMBS in 2016. Of these, 61 were sold in 2020, generating more than RMB 120 billion in revenue, and 52 were completed until the end of the third quarter of 2021, generating about RMB 87.5 billion proceeds.

The types of properties underlying the CMBS products sold show a trend towards greater diversity and continuous increase. These are mainly hotels, apartment and office buildings, logistics warehouses, shopping complexes and infrastructure.

Key points of the projects

Since CMBS is a product in which one or more properties are mortgaged to create the underlying receivables and which, through a structural design, then uses the future income derived from the corresponding properties as the primary source of repayment, the selection of the underlying ownership and the choice of the structure of the transaction are the two most important focal points of this type of product.

(1) Selection of the underlying asset – has the final acceptance of the underlying asset been made and the certificate of registration of the real estate obtained? Whether this is required for the real estate mortgage or as a counterpart to the cash flow generated by the underlying asset, final acceptance of the underlying property should generally have been made and the certificate of real estate registration secured. These are the basic prerequisites for mortgaging a property and putting it into service to generate cash flow. In certain special circumstances, it may be possible to communicate in advance with the regulator on certain buildings already in service and generating stable cash flow, but for which the procedures for real estate registration certificates have not been initiated due to for specific reasons, and to indicate the deadline for completing mortgage registrations.

Are there any restrictions on the mortgage or transfer of the underlying property? Governments in different regions may impose certain mortgage or transfer restrictions on different types of land for a variety of reasons, including economic development or land use planning. For example, in a CMBS project, the underlying property was in a high-tech industrial park. The local government requires the approval of the land granting authority to be obtained before the mortgage, and when mortgage rights are exercised, the land cannot be sold at public auction. The government reclaims the land and only pays compensation equal to the residual value of the buildings on the land for the remaining years.

In a number of other CMBS projects, land grant contracts for underlying properties either required approval before commercial property was granted or required full ownership to be granted. Researching the facts of similar restrictions should be done in advance to determine if they might have an impact on a product’s offering.

What authorizations and approval documents are required for the normal operation of the underlying property. Operation of the underlying property generally requires that the required qualifications or permits be obtained. For example, to operate a hotel, it is necessary to carry out the procedures for permits such as public premises hygiene permit, food business permit, special industry permit, etc. To use paid parking, it is necessary to perform the paid authorization procedures. To erect outdoor advertisements, specific approvals are required.

(2) Selection of the structure of the transaction. Dual and Single Special Purpose Vehicle (SPV) models are the most common CMBS transaction structures. The dual SPV model is where the original beneficiary instructs a trust company to establish a single fund trust or an ownership trust, with the trust acting as the mortgagee. The plan manager then establishes a dedicated asset-backed plan to raise funds to purchase the right to benefit from the trust from the original beneficiary.

In the Single SPV model, the original beneficiary grants a loan directly to the borrower and, once the plan manager establishes a dedicated asset-backed plan to raise funds to purchase the loan receivables from the beneficiary of the loan. Originally, the borrower mortgages the real estate assets directly in favor of the plan manager (representing the dedicated plan).

Since no nested trust is required, the unique SPV model has advantages such as low funding costs, high funding efficiency, and relatively simple operation. However, in practice, the use of the single SPV model depends on the possibility of mortgaging the underlying asset in favor of the plan administrator.

Both natural persons and companies can act as mortgage creditors in the execution of proceedings related to real estate mortgages, according to the 2019 Guidance Opinions on improving the secondary market for the transfer, rental and mortgage of mortgage rights. use of building land published by the Council of State. However, some municipalities may still deal with real estate mortgage registration only when a financial institution approved by the China Banking and Insurance Regulatory Commission, or a small loan company approved by the relevant provincial authority, is the mortgagee as a result of a loan relationship. These areas cannot register real estate mortgages when the mortgagee is a securities company, fund subsidiary, or other plan manager.

Chen Xiuli is a partner at the law firm V&T. She can be contacted on +86 755 8302 6455 or by email at [email protected]