Monday, December 21, 2009
A Guide to Maturing Loans
By Scott Barrie, Managing Director
Investcap Advisors LLC
Below is a very informative article for those seeking to understand the relationship between Master, Special Servicers and Borrowers as it relates to maturing CMBS loans.
A Guide to Maturing CMBS Loans
CMBS Market Commentary
Investcap Advisor LLC
The market is winding down for the year, and uncertainty persists as to whether the dark clouds on the horizon will bring more stormy weather or move away from us and leave a relative calm in the our market. In the opinion of this market participant, the storm will pass over us and bring rain at least for the next three years. Sorry I am not able to spread more holiday cheer. The major headwind that no liquidity facility or amount of optimism will be able to overcome is the $1 trillion in commercial real estate financing that is coming due over the next three years. True, fresh equity will enter this space, but only under terms that make it senior to the existing equity and perhaps after obtaining a partial loan write-down from existing lenders. Market forces will exert pressure toward the realization of these losses. Some projects are so far under water that no realistic
level of recovery will bounce them back to their original basis.
Bargain hunters will have plenty to choose from over this time period.
The market is winding down for the year, and uncertainty persists as to whether the dark clouds on the horizon will bring more stormy weather or move away from us and leave a relative calm in the our market. In the opinion of this market participant, the storm will pass over us and bring rain at least for the next three years. Sorry I am not able to spread more holiday cheer. The major headwind that no liquidity facility or amount of optimism will be able to overcome is the $1 trillion in commercial real estate financing that is coming due over the next three years. True, fresh equity will enter this space, but only under terms that make it senior to the existing equity and perhaps after obtaining a partial loan write-down from existing lenders. Market forces will exert pressure toward the realization of these losses. Some projects are so far under water that no realistic
level of recovery will bounce them back to their original basis.
Bargain hunters will have plenty to choose from over this time period.
CMBS Marketplace Update
Investcap Advisors LLC
The market for CMBS and other debt instruments appears to be winding down as we approach the end of the year. The fourth quarter witnessed to resurgence of the new issue market but it is certain the market will not spring back to its former self anytime soon. It feels like the broker/dealer community remains long positions in CMBS, but the general anticipation is that the market is heading higher next year.
There are good reasons to believe this is so, but the headwinds in the property markets for commercial real estate will remain strong. Activity should be muted this week, except perhaps for the occasional seller looking to square away positions for year end.
The market for CMBS and other debt instruments appears to be winding down as we approach the end of the year. The fourth quarter witnessed to resurgence of the new issue market but it is certain the market will not spring back to its former self anytime soon. It feels like the broker/dealer community remains long positions in CMBS, but the general anticipation is that the market is heading higher next year.
There are good reasons to believe this is so, but the headwinds in the property markets for commercial real estate will remain strong. Activity should be muted this week, except perhaps for the occasional seller looking to square away positions for year end.
Monday, November 30, 2009
Five CMBS stories
Below you will find the text of an analysis of 5 CMBS loans which are current as of this writing however the dscr is at or below 1.0. The text and graphs can be found at www.zerohedge.com . This is excellent reading and we think representative of later vintage CMBS loans. A special thanks to Mike O'Mara for forwarding me this article. Let us know your thoughts after reading.
Scott Barrie
Managing Director
Investcap Advisors LLC
By Tyler Durden
Created 11/28/2009 www.zerohedge.com
Barclays' CMBS team has completed several CMBS narratives of portfolios that are still current but no longer covering debt service. However, instead of a the traditional quantitative black box analysis, BarCap has provided a unique "story" to each case, providing a much needed and comprehensible perspective to the recent sudden rise and even more spectacular fall in commercial real estate. The current state of economic disrepair means a material amount of properties backing up CMBS will likely go from borderline viable on the margin to fully blown collapses very quickly. We recommend this report as it presents the upcoming crash on the "margin" in easily understandable language.
by Aaron Bryson, BarCap U.S. CMBS Strategy
Five CMBS stories, by Aaron Bryson, BarCap U.S. CMBS Strategy
For several months, we have expected an above-consensus increase in the pace of fixed-rate CMBS delinquencies, especially in recent vintages. The key driver, in our view, is the high volume of current, but high-risk loans, specifically those with most recent debt service coverage of 1.1x or less. Our core thesis is that there will be a much higher rate of delinquencies for such loans than in previous CMBS cycles, given the magnitude of property value declines and overall economic stress during this cycle. We have started to see this trend occur in recent months, and we expect it to escalate. In this article, we select five large, recent vintage fixed rate loans in different property types that are still current, but not covering debt service. With the assistance our surveillance team, we profile each loan in greater detail and attempt to explore borrower behaviour.
Background
First, we revisit the current delinquency landscape, focused on recent vintage, fixed-rate loans. For 2005+ vintage loans, the 30+ day delinquency rate is 6.1%, up from 1.1% at the end of 2008. We still believe that we are in the fairly early stages of this rise. This view is supported by the large volume of current, high-risk-of-term-default loans. This includes any loan with a most recent DSCR NCF of <1.1x. Of the $454bn of 2005+ vintage fixed rate loans that are current, $81bn, or 18%, have a most recent DSCR <1.1x, including $55bn <1.0x (Figure 1). Most of these loans have a mark-to-market LTV well in excess of 100%; the latest Moody’s CPPI release reports that CRE property values are down 43% from the peak in October 2007, and back to late 2002 levels.
[1]
Exploring borrower behavior
We do not expect every one of the high-risk loans to default; however, we do expect a much higher percentage of them to default than in prior CMBS cycles. There could be many reasons why a sponsor will continue to stay current even if cash flow does not support the mortgage debt service, for example: availability of pre-funded reserves, expectation of pickup in cash flow due to new leases, use of excess cash flow from other properties to support underperforming property, etc. Many large CMBS loans have a story attached, which may be difficult to grasp from purely quantitative data or conventional default models. We focus on five such stories in recent vintages across the major property types to try to learn why each borrower remains current and whether it will stay that way:
Hotel: $310mn Shutters on the Beach & Casa Del Mar Portfolio A-note in CSMC 07-C4
(largest loan at 15.0% of deal, in CMBX.4); also, associated with the borrower’s interest in this property is $72mn of mezzanine debt.
Multifamily: $375mn The Belnord A-note in JPMCC 06-LDP9 (7.8% of deal, in CMBX.3).
Office: $380mn Columbia Center pari passu A-note, $300mn of which is in MSC07-HQ12 (largest loan at 15.4% of deal, non-CMBX); the remaining $80mn was not
securitized. Also, there is a $100mn B-note outside of the trust.
Industrial: $305mn Schron Industrial Portfolio A-note in GCCFC 07-GG9 (4.7% of deal,
in CMBX3).
Retail: $206mn District at Tustin Legacy A-note in LBUBS 07-C7 (6.5% of deal, in
CMBX.5) backed by a transitional property.
Shutters on the Beach & Casa Del Mar Portfolio
History
Many floating-rate investors are likely familiar with these hotels, as they have a lengthy history as CMBS collateral. The 198 room Shutters on the Beach hotel was first securitized in a floating rate deal, JPMCC 2004-FL1A. This hotel, along with the 129-room Casa del Mar next door, is owned by Edward Thomas Companies.
Shutters on the Beach began development as a Park Hyatt brand property in 1989. In 1992, the developer entered bankruptcy and construction was halted. The Edward Thomas Companies, in partnership with Goldman Sachs, acquired the fee simple interest in the property in 1992 and invested an additional $37.5mn to complete construction. The property opened to the public in June 1993.
In February 2004, it was appraised at $128mn, and a $60mn A-note/$32.5mn B-note loan was originated in April 2004, along with $20mn of mezzanine financing with an April 2006 maturity and extension options. The hotel was reportedly to undergo a $10.5mn renovation to all guest rooms.
The loan was quickly refinanced. In November 2005, Shutters on the Beach was combined with the Casa del Mar hotel as collateral for a $113.9mn A-note, a trust junior component of $6.3mn, a $104.8mn B-note, and $40mn of mezzanine debt for a total debt balance of $265mn. The appraised value of the two hotels was $320mn as of August 2005, of which $204mn was attributed to Shutters on the Beach. The loan was securitized in JPMCC 2006-FL1A, with a November 2007 maturity and extension options.
In June 2007, at the height of aggressive underwriting, the sponsors refinanced again and extracted considerable equity. The hotels qualified as collateral for a seven-year fixed rate loan. A $310mn fixed-rate, interest-only loan with a coupon of 5.5% was originated and securitized in CSMC 07-C4. The loan had a 7y maturity, and there was $72mn of associated mezzanine debt at a rate of 9.8%. The combined A-note and mezzanine debt balance of $382mn equated to $1,168k loan per key. The appraised value of the properties was $450mn, of which $270mn was allocated to Shutters on the Beach. The sponsor planned $11.7mn of renovation for the two properties in 2007. From February 2004 until June 2007, the property value appreciation estimate from appraisals for Shutters on the Beach was 111%, or 26% annually (Figure 2), compared to a 51% cumulative return in the Moody’s CPPI Index over the period.
[2]
Current snapshot
The pullback in hotel demand, especially at the high end, has had a significant effect on these properties. The heavy reliance on business travel (47% of the demand comes from corporate transient and 20% from meetings and groups, as reported in 2007) adds additional pressure. The most recent DSCR at the A-note level for the TTM period ending August 2009 was 0.88x, reflecting a 31% drop in NCF from at underwriting in 2007 (Figure 3). The A-note NOI debt yield now stands at 5.6%. Monthly occupancy reached a low of 51% in December 2008, but has since rebounded to 85% in August 2009 due to “very aggressive marketing efforts,” according to servicer reports (Figure 4). The website for Shutters on the Beach lists specials for advance purchase rooms for as low as $335 per night.
Outlook
We expect the Shutters on the Beach & Casa Del Mar Portfolio loan to default in 9-12 months with a significant loss due to the excessive leverage. The borrower may have remained current as it suspects a sharp rebound in hotel demand and rates, as in prior recessionary cycles.
[3]
However, we believe luxury hotel demand will remain weak in 2010, especially in the business segment. Our loss-given default is based on a combination of a cap rate on net cash flow and value/key comparables. There has been limited sales activity in the luxury hotel sector; however, some recent transactions provide data points for reference (Figure 5). In particular, we believe the recent sale of the St. Regis, Monarch Beach, is a meaningful comparable. We apply an 8.75% cap rate to trailing NCF, which roughly translates to a value per key of $535k. This value estimate, along with advancing and liquidation expenses, results in a loss of 55% to the A-note and a 8.3% deal loss contribution to CSMC 07-C4. Also, we assume a 24 month liquidation period.
[4]
The Belnord
History
Much attention has been focused on recent developments surrounding the Peter Cooper Village & Stuyvesant Town loan, which was based on pro forma assumptions about converting rent stabilized apartment units to market rent units. However, this was not the only property that followed this strategy. The Belnord, the collateral for a $375mn 10y interest only A-note securitized in JPMCC 06-LDP9, followed a similar strategy.
The property, located on the Upper West Side of Manhattan, is a 215-unit multifamily building erected in 1903 and owned by Extell Development. The borrower has spent over $50mn on renovations since purchasing the property in 1994 for a reported $15mn. This suggests that the sponsor extracted a significant profit at the time of the 2007 origination. The debt amounts to $1.7mn per unit, excluding the retail portion which includes 60k sf of retail space. The underwritten NCF was $29.9mn, based on assumptions of turning rentcontrolled units to market rent, versus in place cash NCF of only $11.2mn.
At securitization, the breakdown of the units was 74 market, 22 rent stabilized and 119 rent controlled. The unit mix at securitization had an average monthly rent of $2.22 psf, with rent controlled, stabilized, and market rent units at $0.53psf, $1.35psf, and $5.19psf respectively. The underwritten rent at stabilization was $6.66psf. As of December 2008, only a net three units had been converted to market rates, well below the pro forma conversion rate. To cover the shortfall, a debt service reserve of $49.4mn was funded; the current balance is only $29mn.
Current snapshot
Given the recent court ruling regarding Peter Cooper Village & Stuyvesant Town, The Belnord strategy is in serious jeopardy. The current DSCR as of June 2009 is 0.55x, due to the sponsor’s inability to deregulate units and the property incurring higher-than-expected operating expenses. It is highly unlikely that the property will reach its stabilization in April 2012 as planned.
Outlook
Pre-funded reserves will likely continue to support his loan for the next 2-3 years. We expect a term default with a significant loss after we estimate that the debt service reserves run out in October 2012. The sponsor, Extell Development, has several development projects underway in New York City, which could limit its ability to support the debt service on the Belnord. Applying a cap rate of 6.5%, assuming minimal improvement in cash flow, and factoring in advances and expenses, we expect a loss of 55% to the A-note. This would result in a deal loss contribution of 4.3% to JPMCC 06-LDP9.
Columbia Center
History
For the office sector, we focus on a purchase loan, instead of refinancing. The 1.5mn sf Columbia Center office building in Seattle was part of the EOP/Blackstone/Beacon flip and reflip activity. EOP originally purchased the property in June 1998 from Seafirst Bank for $404mn, or $280/sf. In June 2000, it raised $195mn in a single asset CMBS deal: Columbia Center Trust Series 2000-CCT. After Blackstone purchased EOP for $39bn, it quickly flipped $6.5bn of properties located in Seattle and Washington, DC to Beacon Capital Partners, including Columbia Center.
Beacon found long-term financing through the CMBS market, in the form of a 5y, interestonly $480mn mortgage loan with a 5.6% coupon, comprising a $380mn A-note and a $100mn B-note. The A-note was securitized in MSC07-HQ12. The appraised value of the property was $648mn, or $426 per sf. This is another example of a pro forma loan, as the underwritten net operating income was $31.8mn, versus trailing NOI of $20.5mn, based on expectations of rolling leases to higher market rents. Based on in-place cash flows, the Anote DSCR NCF was approximately 0.81x at origination. At closing, the sponsor escrowed a $3.5mn cash reserve that would remain in place until the NOI reached a 1.05x DSCR. In addition, if the NOI decreased during the loan term, the sponsor would be required to increase the amount of the cash reserve to result a 1.05x DSCR on the whole loan. A $10mn up front reserve was also funded at securitization for future leasing costs.
Current snapshot
Pro forma expectations have not materialized. The June 2009 A-note DSCR was 0.73x, with an occupancy rate of 73% versus 89% at origination. The whole loan DSCR, which should drive default probability, is only 0.57x. Law firm Heller Ehrman (8% of NRA, 13% of total rent, Figure 6) went bankrupt and vacated its space. According to the servicer, Beacon was in the process of leasing some of the Heller Ehrman space and has requested using a portion of the $10mn rollover reserve to fund leasing costs. The current reserve account has a balance of $9mn. In addition, according to REIS, effective rents in the Seattle submarket have declined from $30.2 psf in 2008 to $24.9 psf in Q3 09, with further drops expected through 2011. If these forecasts are realized, there would appear to be little near-term upside from a modification.
[5]
Outlook
We expect pressure from tenant vacancies to escalate. Amazon.com, the largest tenant, is highly likely to vacate or downsize on its lease expiration in 2011, as it is completing an 11- building campus that would lead to a consolidation of its space in the Seattle area. However, due to the existence of the reserve accounts, we do not expect a term default, but a maturity extension of 36 months with a 35% eventual loss. The current NOI A-note debt yield is only 5%, suggesting significant refinancing pressure even if conditions improve before 2012. If the performance of the building deteriorates further, a maturity default is likely, with a higher expected loss due to servicer advancing and liquidation costs.
Schron Industrial Portfolio
History
The collateral for the Schron Industrial Portfolio is a diversified pool of 36 industrial/flex properties across Long Island, NY. The property was originally purchased by Ruben Schron and other investors from First Industrial Realty Trust in October 2000 for nearly $180mn. The purchase was financed with floating rate debt. In late 2006, the sponsor refinanced and extracted considerable equity. Goldman Sachs provided a 10y $305mn interest-only loan with a 5.5% coupon. The financing represented $125mn over the original purchase price back in 2000. At time of origination, the appraised value of the property was $390mn on trailing NOI, which translated to a cap rate of approximately 5%. We marked the loan as pro forma, as the underwritten net cash flow was $24.7mn, based on the expectation of rolling leases to higher market rents. At origination, over 50% of leases expired prior to 2012, which at the time was viewed as a significant positive.
Current snapshot
The pro forma upside has not yet materialized. As shown in Figure 7, occupancy has been on the decline, as the sponsor struggles to find tenants for the expiring leases. Net cash flow was assumed to rise to the underwritten value of $24.7mn; instead, it has slumped to an annualized $15mn, which is below the annual debt service. The sponsor has increased marketing expenses for leasing.
[6]
Outlook
We expect the property to remain under pressure and the loan to hover around a 1.0x DSCR NCF coverage for a prolonged period. Our base case scenario assumes a back-ended default, as we believe the loan is a potential modification candidate. The loan is backed by a portfolio of 36 properties; one potential modification could be a release and sale of some of the better performing properties to partially pay down the principal balance. We apply a cap rate of 8.5% to recent NOI, which results in a loss of 35% to the A-note, with a 24-month liquidation period.
District at Tustin Legacy
History
The last loan, from the retail sector, is a transitional story. The $206mn District at Tustin Legacy loan is backed by a newly constructed 985k shopping center in Tustin, California. The project was part of the redevelopment of the 1,600 acre former Tustin Marine Corps base. The center is anchored by Costco and Lowe’s, which are independently owned and not part of the collateral, along with Target, which is on a ground lease, and Whole Foods, which is part of the collateral. The collateral consists of 522k sf, resulting in a loan balance psf of $395. The property is owned by Vestar and Kimco, a major shopping mall REIT. The 6.9%, 10y interest-only loan was originated in November 2007 and securitized in LBUBS 07-C7. We view this loan as transitional. At securitization, construction at the property had not yet been completed. As of November 2007, only 82% of the space was occupied, despite leases signed for 99% of space. An upfront reserve was established with a balance of $540k. The transitional nature of the property was likely a factor in the higher loan coupon; we estimate that the relative loan SATO was +55bp. (Loan SATO stands for spread at origination, and is adjusted for comparably issued loans made at the same time. A number > zero suggests a higher-than-average loan spread and higher perceived risk from the issuer standpoint.) The borrower stated that the property would stabilize in 1H08.
Also, the loan terms are unique in that they suggest a partnership with the City of Tustin. The city must approve any lease of space over 20K sf and receives 25% of all percentage rents payable to the borrower. The sponsors invested a significant amount in infrastructure improvement in the area around the site.
Current snapshot
The property has yet to stabilize, due to delayed store openings and lower-than-expected rents. The completion of the project coincided with a severe housing bust in the region. MSA level unemployment touched 11.9% in September, well above the national average, as a large portion of employment was tied to housing. High unemployment and falling property values have contributed to weak retail spending and net absorption in Orange County (Figure 8).
The 2008 NOI for District at Tustin Legacy came in at $13.1mn, versus a budgeted amount of $16.8mn. This was due to a decline in average rent to $20.7 psf, versus $26.2 psf at underwriting. Mid-year financials suggest a similar result for 2009, and the most recent DSCR was 0.86x. The loan has been on the servicer watch list since November 2008, and the upfront reserve has been depleted. On the positive side, occupancy has rebounded to 99% as of June 2009, but we suspect that rent concessions have risen as well.
[7]
Outlook
We see continued pressure on retail rents in Orange County; however, we expect the sponsors to give this new development more time to stabilize. Also, the site benefits from strong anchor tenants: Costco, Lowe’s, Target and Whole Foods, with long lease terms. Despite a current DSCR <1.0x, our base case assumption does not include a term default for this loan. We suspect that reported cash flows could improve as free rent periods expire. Also, we see some degree of political downside for the sponsors if they walk away, given the partnership-like structure with the City of Tustin.
However, the current debt yield is only 6.2%. Even under a recovery scenario, we see tremendous refinancing pressure at loan maturity in 2017. For now, we extend the loan 24 months post-maturity and assign a 15% loss, based on applying a 7.75% cap rate to a stabilized NOI projection of $15mn. We believe this loan could also be a modification candidate.
Key takeaways
We randomly focused on five, large “high-risk” loans in recent vintages to explore borrower behavior and the potential for default. Across the $81bn of high risk loans, we see the mostaggressive pro forma assumptions and underwriting in the largest loans. As summarized in Figure 9, we expect losses on each of these loans ranging from 15-55% in our base case, over different time horizons. In terms of exploring behavior, we suspect that these loans are still current due to either pre-funded reserves (The Belnord, Columbia Center), expectations of a sharp recovery (Shutters on the Beach & Casa Del Mar, District at Tustin Legacy), hopes for a modification (Schron Industrial Portfolio), or some combination. As reserves dwindle, we are sceptical that a recovery will be sharp enough to narrow the tremendous gap between these loans and the new underwriting paradigm.
Another common theme is that we see little equity at stake for the borrower, especially in the refinance loans. Many recent vintage borrowers extracted considerable equity at the peak of the market; as a result, we are generally sceptical about the efficacy of loan modifications for such borrowers unless they bring significant new equity into the equation.
[8]
Scott Barrie
Managing Director
Investcap Advisors LLC
By Tyler Durden
Created 11/28/2009 www.zerohedge.com
Barclays' CMBS team has completed several CMBS narratives of portfolios that are still current but no longer covering debt service. However, instead of a the traditional quantitative black box analysis, BarCap has provided a unique "story" to each case, providing a much needed and comprehensible perspective to the recent sudden rise and even more spectacular fall in commercial real estate. The current state of economic disrepair means a material amount of properties backing up CMBS will likely go from borderline viable on the margin to fully blown collapses very quickly. We recommend this report as it presents the upcoming crash on the "margin" in easily understandable language.
by Aaron Bryson, BarCap U.S. CMBS Strategy
Five CMBS stories, by Aaron Bryson, BarCap U.S. CMBS Strategy
For several months, we have expected an above-consensus increase in the pace of fixed-rate CMBS delinquencies, especially in recent vintages. The key driver, in our view, is the high volume of current, but high-risk loans, specifically those with most recent debt service coverage of 1.1x or less. Our core thesis is that there will be a much higher rate of delinquencies for such loans than in previous CMBS cycles, given the magnitude of property value declines and overall economic stress during this cycle. We have started to see this trend occur in recent months, and we expect it to escalate. In this article, we select five large, recent vintage fixed rate loans in different property types that are still current, but not covering debt service. With the assistance our surveillance team, we profile each loan in greater detail and attempt to explore borrower behaviour.
Background
First, we revisit the current delinquency landscape, focused on recent vintage, fixed-rate loans. For 2005+ vintage loans, the 30+ day delinquency rate is 6.1%, up from 1.1% at the end of 2008. We still believe that we are in the fairly early stages of this rise. This view is supported by the large volume of current, high-risk-of-term-default loans. This includes any loan with a most recent DSCR NCF of <1.1x. Of the $454bn of 2005+ vintage fixed rate loans that are current, $81bn, or 18%, have a most recent DSCR <1.1x, including $55bn <1.0x (Figure 1). Most of these loans have a mark-to-market LTV well in excess of 100%; the latest Moody’s CPPI release reports that CRE property values are down 43% from the peak in October 2007, and back to late 2002 levels.
[1]
Exploring borrower behavior
We do not expect every one of the high-risk loans to default; however, we do expect a much higher percentage of them to default than in prior CMBS cycles. There could be many reasons why a sponsor will continue to stay current even if cash flow does not support the mortgage debt service, for example: availability of pre-funded reserves, expectation of pickup in cash flow due to new leases, use of excess cash flow from other properties to support underperforming property, etc. Many large CMBS loans have a story attached, which may be difficult to grasp from purely quantitative data or conventional default models. We focus on five such stories in recent vintages across the major property types to try to learn why each borrower remains current and whether it will stay that way:
Hotel: $310mn Shutters on the Beach & Casa Del Mar Portfolio A-note in CSMC 07-C4
(largest loan at 15.0% of deal, in CMBX.4); also, associated with the borrower’s interest in this property is $72mn of mezzanine debt.
Multifamily: $375mn The Belnord A-note in JPMCC 06-LDP9 (7.8% of deal, in CMBX.3).
Office: $380mn Columbia Center pari passu A-note, $300mn of which is in MSC07-HQ12 (largest loan at 15.4% of deal, non-CMBX); the remaining $80mn was not
securitized. Also, there is a $100mn B-note outside of the trust.
Industrial: $305mn Schron Industrial Portfolio A-note in GCCFC 07-GG9 (4.7% of deal,
in CMBX3).
Retail: $206mn District at Tustin Legacy A-note in LBUBS 07-C7 (6.5% of deal, in
CMBX.5) backed by a transitional property.
Shutters on the Beach & Casa Del Mar Portfolio
History
Many floating-rate investors are likely familiar with these hotels, as they have a lengthy history as CMBS collateral. The 198 room Shutters on the Beach hotel was first securitized in a floating rate deal, JPMCC 2004-FL1A. This hotel, along with the 129-room Casa del Mar next door, is owned by Edward Thomas Companies.
Shutters on the Beach began development as a Park Hyatt brand property in 1989. In 1992, the developer entered bankruptcy and construction was halted. The Edward Thomas Companies, in partnership with Goldman Sachs, acquired the fee simple interest in the property in 1992 and invested an additional $37.5mn to complete construction. The property opened to the public in June 1993.
In February 2004, it was appraised at $128mn, and a $60mn A-note/$32.5mn B-note loan was originated in April 2004, along with $20mn of mezzanine financing with an April 2006 maturity and extension options. The hotel was reportedly to undergo a $10.5mn renovation to all guest rooms.
The loan was quickly refinanced. In November 2005, Shutters on the Beach was combined with the Casa del Mar hotel as collateral for a $113.9mn A-note, a trust junior component of $6.3mn, a $104.8mn B-note, and $40mn of mezzanine debt for a total debt balance of $265mn. The appraised value of the two hotels was $320mn as of August 2005, of which $204mn was attributed to Shutters on the Beach. The loan was securitized in JPMCC 2006-FL1A, with a November 2007 maturity and extension options.
In June 2007, at the height of aggressive underwriting, the sponsors refinanced again and extracted considerable equity. The hotels qualified as collateral for a seven-year fixed rate loan. A $310mn fixed-rate, interest-only loan with a coupon of 5.5% was originated and securitized in CSMC 07-C4. The loan had a 7y maturity, and there was $72mn of associated mezzanine debt at a rate of 9.8%. The combined A-note and mezzanine debt balance of $382mn equated to $1,168k loan per key. The appraised value of the properties was $450mn, of which $270mn was allocated to Shutters on the Beach. The sponsor planned $11.7mn of renovation for the two properties in 2007. From February 2004 until June 2007, the property value appreciation estimate from appraisals for Shutters on the Beach was 111%, or 26% annually (Figure 2), compared to a 51% cumulative return in the Moody’s CPPI Index over the period.
[2]
Current snapshot
The pullback in hotel demand, especially at the high end, has had a significant effect on these properties. The heavy reliance on business travel (47% of the demand comes from corporate transient and 20% from meetings and groups, as reported in 2007) adds additional pressure. The most recent DSCR at the A-note level for the TTM period ending August 2009 was 0.88x, reflecting a 31% drop in NCF from at underwriting in 2007 (Figure 3). The A-note NOI debt yield now stands at 5.6%. Monthly occupancy reached a low of 51% in December 2008, but has since rebounded to 85% in August 2009 due to “very aggressive marketing efforts,” according to servicer reports (Figure 4). The website for Shutters on the Beach lists specials for advance purchase rooms for as low as $335 per night.
Outlook
We expect the Shutters on the Beach & Casa Del Mar Portfolio loan to default in 9-12 months with a significant loss due to the excessive leverage. The borrower may have remained current as it suspects a sharp rebound in hotel demand and rates, as in prior recessionary cycles.
[3]
However, we believe luxury hotel demand will remain weak in 2010, especially in the business segment. Our loss-given default is based on a combination of a cap rate on net cash flow and value/key comparables. There has been limited sales activity in the luxury hotel sector; however, some recent transactions provide data points for reference (Figure 5). In particular, we believe the recent sale of the St. Regis, Monarch Beach, is a meaningful comparable. We apply an 8.75% cap rate to trailing NCF, which roughly translates to a value per key of $535k. This value estimate, along with advancing and liquidation expenses, results in a loss of 55% to the A-note and a 8.3% deal loss contribution to CSMC 07-C4. Also, we assume a 24 month liquidation period.
[4]
The Belnord
History
Much attention has been focused on recent developments surrounding the Peter Cooper Village & Stuyvesant Town loan, which was based on pro forma assumptions about converting rent stabilized apartment units to market rent units. However, this was not the only property that followed this strategy. The Belnord, the collateral for a $375mn 10y interest only A-note securitized in JPMCC 06-LDP9, followed a similar strategy.
The property, located on the Upper West Side of Manhattan, is a 215-unit multifamily building erected in 1903 and owned by Extell Development. The borrower has spent over $50mn on renovations since purchasing the property in 1994 for a reported $15mn. This suggests that the sponsor extracted a significant profit at the time of the 2007 origination. The debt amounts to $1.7mn per unit, excluding the retail portion which includes 60k sf of retail space. The underwritten NCF was $29.9mn, based on assumptions of turning rentcontrolled units to market rent, versus in place cash NCF of only $11.2mn.
At securitization, the breakdown of the units was 74 market, 22 rent stabilized and 119 rent controlled. The unit mix at securitization had an average monthly rent of $2.22 psf, with rent controlled, stabilized, and market rent units at $0.53psf, $1.35psf, and $5.19psf respectively. The underwritten rent at stabilization was $6.66psf. As of December 2008, only a net three units had been converted to market rates, well below the pro forma conversion rate. To cover the shortfall, a debt service reserve of $49.4mn was funded; the current balance is only $29mn.
Current snapshot
Given the recent court ruling regarding Peter Cooper Village & Stuyvesant Town, The Belnord strategy is in serious jeopardy. The current DSCR as of June 2009 is 0.55x, due to the sponsor’s inability to deregulate units and the property incurring higher-than-expected operating expenses. It is highly unlikely that the property will reach its stabilization in April 2012 as planned.
Outlook
Pre-funded reserves will likely continue to support his loan for the next 2-3 years. We expect a term default with a significant loss after we estimate that the debt service reserves run out in October 2012. The sponsor, Extell Development, has several development projects underway in New York City, which could limit its ability to support the debt service on the Belnord. Applying a cap rate of 6.5%, assuming minimal improvement in cash flow, and factoring in advances and expenses, we expect a loss of 55% to the A-note. This would result in a deal loss contribution of 4.3% to JPMCC 06-LDP9.
Columbia Center
History
For the office sector, we focus on a purchase loan, instead of refinancing. The 1.5mn sf Columbia Center office building in Seattle was part of the EOP/Blackstone/Beacon flip and reflip activity. EOP originally purchased the property in June 1998 from Seafirst Bank for $404mn, or $280/sf. In June 2000, it raised $195mn in a single asset CMBS deal: Columbia Center Trust Series 2000-CCT. After Blackstone purchased EOP for $39bn, it quickly flipped $6.5bn of properties located in Seattle and Washington, DC to Beacon Capital Partners, including Columbia Center.
Beacon found long-term financing through the CMBS market, in the form of a 5y, interestonly $480mn mortgage loan with a 5.6% coupon, comprising a $380mn A-note and a $100mn B-note. The A-note was securitized in MSC07-HQ12. The appraised value of the property was $648mn, or $426 per sf. This is another example of a pro forma loan, as the underwritten net operating income was $31.8mn, versus trailing NOI of $20.5mn, based on expectations of rolling leases to higher market rents. Based on in-place cash flows, the Anote DSCR NCF was approximately 0.81x at origination. At closing, the sponsor escrowed a $3.5mn cash reserve that would remain in place until the NOI reached a 1.05x DSCR. In addition, if the NOI decreased during the loan term, the sponsor would be required to increase the amount of the cash reserve to result a 1.05x DSCR on the whole loan. A $10mn up front reserve was also funded at securitization for future leasing costs.
Current snapshot
Pro forma expectations have not materialized. The June 2009 A-note DSCR was 0.73x, with an occupancy rate of 73% versus 89% at origination. The whole loan DSCR, which should drive default probability, is only 0.57x. Law firm Heller Ehrman (8% of NRA, 13% of total rent, Figure 6) went bankrupt and vacated its space. According to the servicer, Beacon was in the process of leasing some of the Heller Ehrman space and has requested using a portion of the $10mn rollover reserve to fund leasing costs. The current reserve account has a balance of $9mn. In addition, according to REIS, effective rents in the Seattle submarket have declined from $30.2 psf in 2008 to $24.9 psf in Q3 09, with further drops expected through 2011. If these forecasts are realized, there would appear to be little near-term upside from a modification.
[5]
Outlook
We expect pressure from tenant vacancies to escalate. Amazon.com, the largest tenant, is highly likely to vacate or downsize on its lease expiration in 2011, as it is completing an 11- building campus that would lead to a consolidation of its space in the Seattle area. However, due to the existence of the reserve accounts, we do not expect a term default, but a maturity extension of 36 months with a 35% eventual loss. The current NOI A-note debt yield is only 5%, suggesting significant refinancing pressure even if conditions improve before 2012. If the performance of the building deteriorates further, a maturity default is likely, with a higher expected loss due to servicer advancing and liquidation costs.
Schron Industrial Portfolio
History
The collateral for the Schron Industrial Portfolio is a diversified pool of 36 industrial/flex properties across Long Island, NY. The property was originally purchased by Ruben Schron and other investors from First Industrial Realty Trust in October 2000 for nearly $180mn. The purchase was financed with floating rate debt. In late 2006, the sponsor refinanced and extracted considerable equity. Goldman Sachs provided a 10y $305mn interest-only loan with a 5.5% coupon. The financing represented $125mn over the original purchase price back in 2000. At time of origination, the appraised value of the property was $390mn on trailing NOI, which translated to a cap rate of approximately 5%. We marked the loan as pro forma, as the underwritten net cash flow was $24.7mn, based on the expectation of rolling leases to higher market rents. At origination, over 50% of leases expired prior to 2012, which at the time was viewed as a significant positive.
Current snapshot
The pro forma upside has not yet materialized. As shown in Figure 7, occupancy has been on the decline, as the sponsor struggles to find tenants for the expiring leases. Net cash flow was assumed to rise to the underwritten value of $24.7mn; instead, it has slumped to an annualized $15mn, which is below the annual debt service. The sponsor has increased marketing expenses for leasing.
[6]
Outlook
We expect the property to remain under pressure and the loan to hover around a 1.0x DSCR NCF coverage for a prolonged period. Our base case scenario assumes a back-ended default, as we believe the loan is a potential modification candidate. The loan is backed by a portfolio of 36 properties; one potential modification could be a release and sale of some of the better performing properties to partially pay down the principal balance. We apply a cap rate of 8.5% to recent NOI, which results in a loss of 35% to the A-note, with a 24-month liquidation period.
District at Tustin Legacy
History
The last loan, from the retail sector, is a transitional story. The $206mn District at Tustin Legacy loan is backed by a newly constructed 985k shopping center in Tustin, California. The project was part of the redevelopment of the 1,600 acre former Tustin Marine Corps base. The center is anchored by Costco and Lowe’s, which are independently owned and not part of the collateral, along with Target, which is on a ground lease, and Whole Foods, which is part of the collateral. The collateral consists of 522k sf, resulting in a loan balance psf of $395. The property is owned by Vestar and Kimco, a major shopping mall REIT. The 6.9%, 10y interest-only loan was originated in November 2007 and securitized in LBUBS 07-C7. We view this loan as transitional. At securitization, construction at the property had not yet been completed. As of November 2007, only 82% of the space was occupied, despite leases signed for 99% of space. An upfront reserve was established with a balance of $540k. The transitional nature of the property was likely a factor in the higher loan coupon; we estimate that the relative loan SATO was +55bp. (Loan SATO stands for spread at origination, and is adjusted for comparably issued loans made at the same time. A number > zero suggests a higher-than-average loan spread and higher perceived risk from the issuer standpoint.) The borrower stated that the property would stabilize in 1H08.
Also, the loan terms are unique in that they suggest a partnership with the City of Tustin. The city must approve any lease of space over 20K sf and receives 25% of all percentage rents payable to the borrower. The sponsors invested a significant amount in infrastructure improvement in the area around the site.
Current snapshot
The property has yet to stabilize, due to delayed store openings and lower-than-expected rents. The completion of the project coincided with a severe housing bust in the region. MSA level unemployment touched 11.9% in September, well above the national average, as a large portion of employment was tied to housing. High unemployment and falling property values have contributed to weak retail spending and net absorption in Orange County (Figure 8).
The 2008 NOI for District at Tustin Legacy came in at $13.1mn, versus a budgeted amount of $16.8mn. This was due to a decline in average rent to $20.7 psf, versus $26.2 psf at underwriting. Mid-year financials suggest a similar result for 2009, and the most recent DSCR was 0.86x. The loan has been on the servicer watch list since November 2008, and the upfront reserve has been depleted. On the positive side, occupancy has rebounded to 99% as of June 2009, but we suspect that rent concessions have risen as well.
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Outlook
We see continued pressure on retail rents in Orange County; however, we expect the sponsors to give this new development more time to stabilize. Also, the site benefits from strong anchor tenants: Costco, Lowe’s, Target and Whole Foods, with long lease terms. Despite a current DSCR <1.0x, our base case assumption does not include a term default for this loan. We suspect that reported cash flows could improve as free rent periods expire. Also, we see some degree of political downside for the sponsors if they walk away, given the partnership-like structure with the City of Tustin.
However, the current debt yield is only 6.2%. Even under a recovery scenario, we see tremendous refinancing pressure at loan maturity in 2017. For now, we extend the loan 24 months post-maturity and assign a 15% loss, based on applying a 7.75% cap rate to a stabilized NOI projection of $15mn. We believe this loan could also be a modification candidate.
Key takeaways
We randomly focused on five, large “high-risk” loans in recent vintages to explore borrower behavior and the potential for default. Across the $81bn of high risk loans, we see the mostaggressive pro forma assumptions and underwriting in the largest loans. As summarized in Figure 9, we expect losses on each of these loans ranging from 15-55% in our base case, over different time horizons. In terms of exploring behavior, we suspect that these loans are still current due to either pre-funded reserves (The Belnord, Columbia Center), expectations of a sharp recovery (Shutters on the Beach & Casa Del Mar, District at Tustin Legacy), hopes for a modification (Schron Industrial Portfolio), or some combination. As reserves dwindle, we are sceptical that a recovery will be sharp enough to narrow the tremendous gap between these loans and the new underwriting paradigm.
Another common theme is that we see little equity at stake for the borrower, especially in the refinance loans. Many recent vintage borrowers extracted considerable equity at the peak of the market; as a result, we are generally sceptical about the efficacy of loan modifications for such borrowers unless they bring significant new equity into the equation.
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Monday, November 23, 2009
DDR CMBS Offering
Investcap Advisors LLC
After a very long dry spell, the CMBS new issue market has finally come to life with its first offering since early 2008. In a deal led by Goldman Sachs and co-managed by Citigroup, Developers Diversified Realty Corporation is the borrower on one loan collateralized by 28 retail properties located in 19 separate states. This is the extent of the deal’s collateral, but what the deal lacks in diversity is made up for in the loan’s very conservative underwriting. One of the most crucial aspects of this deal that made is possible is the federal governments willingness to provide financing for the purchase of the bonds under its Term Asset-Backed Securities Lending Facility (TALF). This deal is clearly not a sign of lenders originating and warehousing debt for the securitization market, but it is a positive step and will certainly aid market participants in the price discovery process that will hopefully limit losses in CMBS.
After a very long dry spell, the CMBS new issue market has finally come to life with its first offering since early 2008. In a deal led by Goldman Sachs and co-managed by Citigroup, Developers Diversified Realty Corporation is the borrower on one loan collateralized by 28 retail properties located in 19 separate states. This is the extent of the deal’s collateral, but what the deal lacks in diversity is made up for in the loan’s very conservative underwriting. One of the most crucial aspects of this deal that made is possible is the federal governments willingness to provide financing for the purchase of the bonds under its Term Asset-Backed Securities Lending Facility (TALF). This deal is clearly not a sign of lenders originating and warehousing debt for the securitization market, but it is a positive step and will certainly aid market participants in the price discovery process that will hopefully limit losses in CMBS.
Tuesday, November 10, 2009
Weekly Commentary from Investcap Advisors LLC - This week’s topic: Bringing product to market
By John J. Richard, Managing Director, Investcap Advisors LLC
In addition to the commentary posted last week on the Public-Private Investment Program (PPIP) for legacy CMBS, there is also a component of the program meant to provide financing for legacy loans on commercial real estate. The purpose (or thinking, in terms of the federal government) is to help alleviate bank balance sheets of the burden of carrying troubled loans originated before the beginning of the liquidity crisis. The existence of these loans raises two very critical issues that have far-reaching implications. First, where should financial institutions that hold this debt be marking it from a valuation perspective? To some degree, regulatory relief has been provided as some institutions have exercised the language of FAS 157. The issue is, however, what is the true value and will banks need additional capital relief from the government if they are forced to write down the value of the debt. Second, the other broad implication that stretches into the CMBS arena concerns price discovery and the necessity of that process. If banks begin dumping their debt holdings into a very thinly traded market, that valuation will and should be translated into the debt in the securitized world of CMBS. For now, PPIP is encouraging buyers to step forward, but the real need is for sellers to emerge with items on which to bid.
In addition to the commentary posted last week on the Public-Private Investment Program (PPIP) for legacy CMBS, there is also a component of the program meant to provide financing for legacy loans on commercial real estate. The purpose (or thinking, in terms of the federal government) is to help alleviate bank balance sheets of the burden of carrying troubled loans originated before the beginning of the liquidity crisis. The existence of these loans raises two very critical issues that have far-reaching implications. First, where should financial institutions that hold this debt be marking it from a valuation perspective? To some degree, regulatory relief has been provided as some institutions have exercised the language of FAS 157. The issue is, however, what is the true value and will banks need additional capital relief from the government if they are forced to write down the value of the debt. Second, the other broad implication that stretches into the CMBS arena concerns price discovery and the necessity of that process. If banks begin dumping their debt holdings into a very thinly traded market, that valuation will and should be translated into the debt in the securitized world of CMBS. For now, PPIP is encouraging buyers to step forward, but the real need is for sellers to emerge with items on which to bid.
Tuesday, November 3, 2009
Public-Private Investment Program (PPIP) Review
By John J. Richard, Managing Director, Investcap Advisors LLC
After some delay and much anticipation, funds from the Public-Private Investment Program have started to trickle into the capital markets. One of the main goals of the program was to spur liquidity in the securitized debt market. The hope was that increased liquidity and activity in this market would hasten the return of asset securitization as a prominent funding vehicle. As is widely known, the extension of credit through the securitization markets has completely dried up in commercial real estate. So what are the early indications for success for this program? Well, it is clearly to early to gauge the success in terms of the CMBS market, but early signs suggest that PPIP managers are confining their purchase activity to the very highest levels of the capital structure. This does not bode well for the levels right below, i.e., the AM and AJ tranches, which in turn will likely translate into the inability of some of the more aggressively underwritten loans from 2005-2008 to refinance. As a result, distressed loan opportunities in desperate need of capital infusions may become plentiful.
Monday, October 26, 2009
New York Appellate Division Ruling
By John J. Richard, Managing Director, Investcap Advisors LLC
The property markets received another jolt this week, this time coming from the New York Appellate Division. A very tenant-friendly ruling handed down this week indicated that Tishman Speyer, the owner of Stuyvesant Town and Peter Cooper Village in Manhattan, had illegally converted roughly 4,000+ units from rent controlled/stabilized status to market rent. The issue in this ruling centered around whether an owner of a multi family property could renovate units taking advantage of certain tax abatements and still convert those units to market. This ruling evidently contradicts a decade-old policy promulgated by a New York City housing commission. It is unclear whether Metropolitan Life, the previous developer and owner of the multi family project, will also be held partially responsible for this practice prior to their sale of the property in 2006. The senior mortgage on Stuy Town/Peter Cooper has garnered much attention over the past year as the debt service reserve established at closing nears depletion. Portions of this senior debt ($3 billion) are spread across multiple CMBS deals. This ruling will certainly place an added stress on Tishman’s ability to service the debt and it has obvious implications for other multi family projects in New York City that conducted the same rent conversion practice while also taking advantage of the tax abatements.
The property markets received another jolt this week, this time coming from the New York Appellate Division. A very tenant-friendly ruling handed down this week indicated that Tishman Speyer, the owner of Stuyvesant Town and Peter Cooper Village in Manhattan, had illegally converted roughly 4,000+ units from rent controlled/stabilized status to market rent. The issue in this ruling centered around whether an owner of a multi family property could renovate units taking advantage of certain tax abatements and still convert those units to market. This ruling evidently contradicts a decade-old policy promulgated by a New York City housing commission. It is unclear whether Metropolitan Life, the previous developer and owner of the multi family project, will also be held partially responsible for this practice prior to their sale of the property in 2006. The senior mortgage on Stuy Town/Peter Cooper has garnered much attention over the past year as the debt service reserve established at closing nears depletion. Portions of this senior debt ($3 billion) are spread across multiple CMBS deals. This ruling will certainly place an added stress on Tishman’s ability to service the debt and it has obvious implications for other multi family projects in New York City that conducted the same rent conversion practice while also taking advantage of the tax abatements.
Monday, October 19, 2009
CRE Price Discovery
By John Richard, Managing Director Investcap Advisors LLC
Many market participants hold the belief that the property markets still have several years of price correction ahead of it, but the process of price discovery took a few steps forward last week with Tishman's sale of two office properties in California. One of the properties sold in San Francisco represented a 20% decline from its 2005 purchase price while the Santa Ana sale saw a drop in price of 60% from its 2007 acquisition level. These two projects lend insight into the rapid price appreciation in the market from 2005-2007 and what may be motivating borrowers and/or sellers in today's market conditions. One other notable Tishman property that plays very prominently in several 2007 vintage CMBS deals is the Peter Cooper Village & Stuyvesant Town project. At sale and origination of the financing, this project was valued at roughly $6 billion with $3 billion used as debt financing. By some accounts, this project is now valued at closer to $2 billion which represents roughly a 30% loss to the first mortgage. With the loan now having less than three months of reserves to service the debt, this loan will be interesting to watch from a price discovery and servicer workout perspective.
Many market participants hold the belief that the property markets still have several years of price correction ahead of it, but the process of price discovery took a few steps forward last week with Tishman's sale of two office properties in California. One of the properties sold in San Francisco represented a 20% decline from its 2005 purchase price while the Santa Ana sale saw a drop in price of 60% from its 2007 acquisition level. These two projects lend insight into the rapid price appreciation in the market from 2005-2007 and what may be motivating borrowers and/or sellers in today's market conditions. One other notable Tishman property that plays very prominently in several 2007 vintage CMBS deals is the Peter Cooper Village & Stuyvesant Town project. At sale and origination of the financing, this project was valued at roughly $6 billion with $3 billion used as debt financing. By some accounts, this project is now valued at closer to $2 billion which represents roughly a 30% loss to the first mortgage. With the loan now having less than three months of reserves to service the debt, this loan will be interesting to watch from a price discovery and servicer workout perspective.
Monday, October 12, 2009
CMBS Roadmap: Where Is Your Loan Going?
- From: MULTIFAMILY EXECUTIVE 2009
- Posted on: October 8, 2009 12:44:00 PM
When the apartment market was hot and heavy a couple of years ago, commercial mortgage-backed securities (CMBS) loans offered a great option for buyers.
Now, that world is falling apart. The numbers floating out there about CMBS problems are staggering. Deutsche Bank says 65 percent of commercial mortgages are maturing over the next few years, and $100 billion will not qualify for refinancing. Meanwhile, Fitch Ratings says $36.1 billion in CMBS has been transferred to Special Servicing.
But as multifamily owners deal with their own CMBS issues, there is uncertainty about what happens to CMBS loans and where to go when your loan is in trouble.
When a CMBS loan is made, the bank doesn’t just keep it on its books. “The loan is sold into a trust one time,” says Steve Russo, founder of The Commercial Real Estate Finance Group, a real estate advisory and investment group in Ft. Lauderdale, Fla. “That’s the last time the individual loan was dealt with. The trust is chopped up into different traunches. Those pieces then change hands multiple times. Once the loan is sold into the trust the first time, that’s the last time you deal with the individual loan.”
Different groups such as insurance companies and pension fund managers buy those pieces. Then a primary servicer, who is responsible for the direct borrower contact and collecting and remitting the payments, takes over. There’s also a master servicer (usually that’s also done by the same company that handles primary servicing), which is unique to CMBS, and it has a number of responsibilities, including overseeing the primary supervisor; collecting from the primary servicer and remitting to trustee; doing investor reporting across portfolios; advancing principal expenses; and handling approvals or requests from borrower or assignment of assumption or release of reserve.
The master servicer also administers the loan documents and has right to certain modifications specified in the loan documents, such as assignment/assumption, change in borrower entity, and release of reservists and escrow.
Special Servicers
If a loan runs into trouble, it’s up to the master servicer to pass it to a special servicer. Usually, this happens after there’s a delinquency of 60 or more days, a default by the borrower, or an imminent judgment is on the way. Special servicers are allowed to make some modifications to the loan documents. [See our list of 10 of the top special servicers here.]
With so many loans on the way, a lot of special servicers are now staffing up. In fact, one who wouldn’t be identified for this story, has seen its portfolio (of which multifamily is the biggest component) increase tenfold over past 30 months. It has had to more than double its number of assets managers in the past two years.
If the loan starts performing again or a solution can be worked out, it can be transferred back to the borrower. “Up until the end, the owner may be able to cure the default or renegotiate,” says Pierce Ledbetter, CEO of Memphis-based LEDIC Management, a fee manager that handles operations for a number of distressed assets.
If the owner doesn’t, the special servicer begins the foreclosure process, which can take as much as a year. “Most of them [the special servicers] aren’t in the business of owning,” says John Bartling, co-founder and managing director of Dallas-based AllBridge Investments.
Depending on the jurisdiction a special servicers or a court can appoint a recover to take care of the asset in the meantime. The receiver finds a property manager, which it could also be affiliated with. “A special servicer, once they have foreclosed, will go into it just like any other property owner and hire a property manager,” Russo says.
And that can offer opportunity for apartment managers.
Public-Private Investment Program (PPIP)
By John Richard, Managing Director, Investcap Advisors LLC
Despite the much anticipated arrival of Public-Private Investment Program (PPIP) assets in the market, the market for CMBS softened over the past week. Market participants are perhaps realizing that the rally in mezzanine tranches was a bit overblown given the deteriorating fundamentals in the property markets. The two announcements this past week that gave the market pause concerned the release of third quarter leasing information and the continued realization that maturing loans are going to pressure the lending community for the next several years. Office vacancies rose nationally rose into the mid-teens while occupancies in the multi family housing sector plunged due in part to the injection of newly built condos into the rental market that were intended for sale. The slump in the housing market and the economic recessionary conditions will continue to pressure the various property types in commercial real estate for some time to come. Apart from that, what also weighs on the market is the over $1 trillion in debt that is coming due between now and the end of 2012. This is a condition that the government financing programs will have less of an impact on since the underwriting processes in practice now are dramatically different than those in place when the maturing loans were originally underwritten.
Despite the much anticipated arrival of Public-Private Investment Program (PPIP) assets in the market, the market for CMBS softened over the past week. Market participants are perhaps realizing that the rally in mezzanine tranches was a bit overblown given the deteriorating fundamentals in the property markets. The two announcements this past week that gave the market pause concerned the release of third quarter leasing information and the continued realization that maturing loans are going to pressure the lending community for the next several years. Office vacancies rose nationally rose into the mid-teens while occupancies in the multi family housing sector plunged due in part to the injection of newly built condos into the rental market that were intended for sale. The slump in the housing market and the economic recessionary conditions will continue to pressure the various property types in commercial real estate for some time to come. Apart from that, what also weighs on the market is the over $1 trillion in debt that is coming due between now and the end of 2012. This is a condition that the government financing programs will have less of an impact on since the underwriting processes in practice now are dramatically different than those in place when the maturing loans were originally underwritten.
Friday, October 2, 2009
OCC potential directive has implications on marking down values of commercial loans.
By John Richard, Managing Director, Investcap Advisors LLC
In an announcement that came as a surprise to many CMBS market participants, the Office of the Comptroller of the Currency (OCC) is considering a move that would require banks to mark down the value of some of their commercial real estate loans. This announcement has two broad implications. First, the OCC would only consider such a move for certain institutions that are healthy enough to weather a decline in asset value. This points to the very favorable effects low interest rates are having on the earnings potential of banking institutions. One so called financial health measure, NIM (Net Interest Margin), has improved recently for some institutions. Low rates allow banks to pay low interest on deposits at a time when these same institutions are finding attractive lending opportunities with appropriate risk premiums. The second broad implication associated with this potential OCC directive concerns the all-important process of price discovery. Market recovery in the commercial real estate market will be difficult to pinpoint if a bottom cannot be felt. It is difficult to feel this bottom without transactions occurring. The OCC directive will force the hand of banks to write down the value of loans that have not generated a mortgage payment for the last three months or more. Performing loans may also be written down. Hypothetically, this process could create a market of interested loan sellers (the banks) previously reluctant to sell in a down market which hopefully would lead to the entrance of private investor capital back into the market. The implications for CMBS, generally speaking, are less certain but pricing clarity in the whole loan market could certainly be construed as a positive for Servicers and Borrowers alike in the midst of workout situations.
In an announcement that came as a surprise to many CMBS market participants, the Office of the Comptroller of the Currency (OCC) is considering a move that would require banks to mark down the value of some of their commercial real estate loans. This announcement has two broad implications. First, the OCC would only consider such a move for certain institutions that are healthy enough to weather a decline in asset value. This points to the very favorable effects low interest rates are having on the earnings potential of banking institutions. One so called financial health measure, NIM (Net Interest Margin), has improved recently for some institutions. Low rates allow banks to pay low interest on deposits at a time when these same institutions are finding attractive lending opportunities with appropriate risk premiums. The second broad implication associated with this potential OCC directive concerns the all-important process of price discovery. Market recovery in the commercial real estate market will be difficult to pinpoint if a bottom cannot be felt. It is difficult to feel this bottom without transactions occurring. The OCC directive will force the hand of banks to write down the value of loans that have not generated a mortgage payment for the last three months or more. Performing loans may also be written down. Hypothetically, this process could create a market of interested loan sellers (the banks) previously reluctant to sell in a down market which hopefully would lead to the entrance of private investor capital back into the market. The implications for CMBS, generally speaking, are less certain but pricing clarity in the whole loan market could certainly be construed as a positive for Servicers and Borrowers alike in the midst of workout situations.
Monday, September 28, 2009
REMIC Rule Changes….will servicers adjust their strategy?
by John Richard, Managing Director, Investcap Advisors LLC
Borrowers may feel the day of reckoning has been delayed, but this is likely less of a positive for which CMBS market participants are giving it credit. Servicers are not going to be sitting idle with problems over the next twelve months given the maturing loan pipeline and increasing delinquency rate. This argues strongly against taking any decisive action today on a currently performing mortgage that is not due to mature until 2012. There is also the issue of how certain bond investors will feel given pre-emptive modifications. Actions taken ahead of perceived and expected problems will certainly have a dramatic impact on cash flows into a CMBS pool. Not everyone benefits in this scenario. Apart from the issues with bond investors and an increased workload at the servicer level, the prevailing wisdom acknowledges that the underwriting excesses of the past need to work their way out of the system. Modifications in many instances simply mute the symptoms but do not cure the illness.
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