Asia-Based Investors in U.S. Commercial Real Estate Can Mitigate Losses by Defending their Legal Rights

Many Chinese and other Asian investors have poured money into the U.S. commercial real estate market, whether investing directly in property or through commercial mortgage-backed securities (CMBS) or real estate investment trusts (REITs). However, the pandemic, the fastest interest rate hike in decades and a drawback from risk-taking by U.S. regional banks in the wake of bank failures have dealt grievous blows to the market, leading many investors vulnerable to mortgage defaults and lower valuations on their investments.

Rather than bear the losses, Asia-based investors can often limit the damage and obtain recoveries if they deploy proactive or counteroffensive strategies to enforce their legal rights, even against the biggest industry players.   Below are some examples of what some investors may face.

U.S. Commercial Real Estate Disputes

Establishing losses in a joint venture. Many Chinese and other non-U.S. investors invest directly in U.S. commercial real estate property through a joint venture. However, with the market flagging, many partnerships see losses as they need help to lease or sell their properties. This comes at the same time as many mortgage payments come due.

The question then becomes: how should these losses be shared? Surprisingly, many joint venture contracts are written without contemplating such a scenario, especially given complex voting and equity rules in many of these partnerships. Investors should consider deploying creative, cross-border strategies against major players to protect their interests.

Holding deal participants accountable. With mortgage delinquencies and defaults rising, many commercial mortgage-based securities (CMBS) will likely come under special servicing.

The pooling and servicing agreement enables certificate holders with a certain percentage of voting rights (normally above 25%) to direct the trustee to sue the special servicer. The directing holder, with approval from the trustee, can often direct the special servicer or appoint a successor special servicer to pursue a variety of claims regarding the underlying mortgage loans and the “reps and warranties” that accompanied them.

Challenging valuations. The valuation of the collateral underlying a CMBS—i.e., the commercial mortgage loans it holds—greatly impacts bondholders’ loss position, control rights and in turn ability to maximize recoveries. Asia-based investors need to be willing to stand up to other bondholders – even industry giants – regarding valuation of the CMBS portfolio to protect their financial interests.

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As the U.S. commercial real estate market continues to chill, Asia-based investors would do well to consider their options as early as possible. Rather than accept their losses, they should consider protecting their legitimate legal and business interests to ensure a more favorable outcome.

About Kobre & Kim

Kobre & Kim is a global law firm that focuses on cross-border disputes and investigations, often involving fraud and misconduct. Our team:

• Represents major corporations, investment funds and portfolio companies to litigate high-stakes trials and other commercial disputes adverse to major financial institutions and other market constituents.
• Acts in a variety of high-stakes creditor disputes, high-value M&A and corporate governance disputes, independent investigations on behalf of corporate boards, and in disputes involving equity and fixed income securities and complex derivatives.
• Offers deep experience coordinating strategies across jurisdictions, often involving clients, assets and adversaries in the PRC and other Asian countries, with lawyers admitted across the U.S., Asia, UK, EMEA, Latin America and key offshore financial centers.