Dan Smith, president and ceo of Four Point Alliance, answers SCI's questions

Q: How and when did Four Point Alliance become involved in the CMBS market?
A: Four Point Alliance (FPA) is a commercial real estate advisory firm specialising in expert witness testimony in CMBS and other types of commercial real estate lawsuits, CMBS loan servicing and asset management. I formed the firm in 2009 to assist borrowers, lenders and CMBS servicers in navigating the CMBS servicing process. Indeed, the four points referred to in the firm's name represent our four client groups - borrowers, investors, lenders and third-party providers.

FPA is allied with Hart Advisors Group, which specialises in CRE equity portfolio management, loan restructures, loan assumptions and due diligence. The alliance involves referring business to each other: I refer asset management work to Hart Advisors and they refer litigation support work to FPA.

I previously led RBC's CRE lending group and after the bank closed it down, I was asked to work as an expert witness in a CMBS case. I realised that this might be a good niche to move into, especially given that - at the time - it was apparent that CRE lending probably wasn't going to pick up for a while.

Q: What are your key areas of focus today?
A: At present, I'm mainly focused on CMBS expert witness work. So far, I've been involved with many cases, the majority of which have been settled without going to trial.

Primarily the alliance with Hart works on behalf of investors that are in litigation with CMBS issuers, but I've also been involved in suits between servicers and borrowers. The work ranges from consulting to testifying, which entails scrutinising legal documents at time of occurrence, as well as any electronic communication and the underwriting files prepared by the lender.

I then produce a report supporting my findings for the judge and undergo a deposition. If the case goes to trial, I have to testify in court.

Most cases concern deals from 2005-2007, but by the time I'm involved they'll usually have been in dispute for over a year. The focus of the cases is usually on reps and warranty issues or a bankruptcy plan.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: I also work with borrowers who are late with payments or are experiencing non-monetary defaults or undergoing assumptions. Special servicers are extremely busy at present and don't have time to manage borrowers through the process. For many borrowers, it's the first time that they've been involved with a loan modification, so I essentially guide them through it.

The process is complicated and involves talking to the special servicer about their decisions and then liaising with the borrower. Sometimes it's a matter of getting files together with relevant information, such as data about the property, cash flow and what has caused the distress.

In many cases, property values have declined so much that the borrower can't refinance - this is particularly the case now that there are fewer lenders around. Those that are lending aren't lending to the LTVs needed. At the same time, cap rates have also risen.

When dealing with servicers, it is very important for borrowers to bring equity to the table. We can provide access to equity if a borrower needs it, but this isn't an area of our business that we market strongly.

Finally, in terms of the asset management side of the business, we'll advise on ways to grow operating income, as well as on the improvements process, and negotiating with tenants and vendors.

Q: How do you differentiate yourself from your competitors?
A: There aren't that many expert witnesses in the CRE/CMBS industry, so I don't have much competition. It's somewhat of a confrontational business, so many professionals stay out or have conflicts. However, if there's a conflict of interest, I'll refer business to someone else.

Q: What major developments do you need/expect from the market in the future?
A: Looking ahead, the CMBS market needs to stabilise: volatility in underwriting has to decrease and lenders need to develop a longer-term view on the sector.

Part of the problem is the paucity in available hedging strategies; not everyone is comfortable using synthetic indices, for example. I don't think we'll see many US$1bn-plus pools emerging any time soon because of the warehouse risk.

Instead, issuers will go to the market more frequently with smaller pools, teaming up with other banks in the process. To be successful, these partnerships need to embrace consistency in underwriting and a similar philosophy in terms of leverage levels and property types.

It would help investor acceptance if CMBS structures included reserves for maintenance and operational repairs, as well as reserves for shortfalls incurred while leases are being renewed or improvements are made. We're beginning to see these reserves included in deals, but not as frequently as investors would like.

While underwriting is becoming more homogeneous now, accumulation of collateral remains an issue because the market is so volatile. We've seen many instances of differing interest rates at time of application and execution, which has ultimately lengthened the pipeline.

Nevertheless, I expect a modest increase in CMBS volume next year. We're on target to hit US$30bn of issuance this year, so 2012's tally will probably be in the region of US$40bn-US$50bn.

Certainly, we'll see growth if the markets stabilise - after all, there is significant need for financing, with the magnitude of loans coming due over the next few years. Insurance firms will continue to play a significant role next year, albeit at not a particularly high enough percentage of the total refinancing necessary. Ultimately, the CMBS sector needs increased investor acceptance at both senior and subordinate levels.

CS