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Ob-La-Di, Ob-La-Da: Life Goes on for Nonperforming Loans

In This CMBS Deal, Most of the Collateral is Nonpaying, Nonperforming
April 4, 2012
Homebuilder Lennar Corp., which found success in the distressed investment arena through its Rialto Capital Management subsidiary, gave the CMBS industry another boost this past week by putting out the first CMBS issuance of non-performing commercial real estate loans in years.

How big a deal is this to the CMBS market? One Trepp LLC analyst summed it up this way: "This is something that excites us every bit as much as the release of the Beatles' White Album did… We hope that this is the first of many to hit the market over the next few months."

The Rialto Capital Series 2012-LT1 deal is a collection of loans, most of which are REO or delinquent. (There are also a smaller percentage of loans that are still performing as some additional collateral.) Most of the collateral is currently non-paying and all non-performing assets are assumed to have a 0% coupon.

"In other words, the assets do not generate enough cash to pay the fees and bond interest at issuance," Trepp said.

The deal has been set up as a liquidating trust: the collateral manager will seek to dispose of the assets quickly enough to pay down the bond balance before the reserves to pay deal fees and bond interest are depleted. The deal is over-collateralized to account for future anticipated loan losses.

Fitch Ratings expects to give the $132 million deal a BBB rating; Moody's Investors Service a Baa3 rating.

The notes are secured by 271 performing and nonperforming mortgages securing 266 properties, 11 unsecured loans, and 38 properties acquired at acquisition or through foreclosure.

Prior to securitization, the assets were owned by Rialto Real Estate Fund LP in separate subsidiaries that held the loans and the REO.

Post-closing, the parent issuer will form an REO subsidiary for each loan prior to the conversion to REO status, and the REO subsidiary will hold title to such REO property.

The three largest loans in the CMBS pool are as follows.

Collateral for loan 1 is a 135-room Sheraton hotel in downtown Columbia, SC. Built as an office building in 1913, the property, known as the Palmetto Building, is listed in the National Register of Historic Places. The subject was acquired in 2004 and converted to its current use in 2008. Original loan proceeds of approximately $16 million were used to reposition the asset. The loan is currently nonperforming due to maturity default.

Loan 2 is secured by a 181-room Holiday Inn Hotel and Suites in Columbia, SC, which was originated in 2006 for $8.76 million. The loans were used to finance acquisition and renovation of the subject and are currently non-performing.

Loan 3 is secured by a 145,545-square-foot office building in Miami Lakes, FL, within Miami's Hialeah submarket. Originally constructed in 1983, the subject was purchased by the borrower in September 2008 for $11.4 million with the intent to renovate and reposition the asset. The loan is currently nonperforming, with outstanding debt of approximately $12.3 million relative to the initial loan balance of $18.4 million.

Lennar's Rialto Capital Management has invested more than $1.1 billion to acquire more than $5.2 billion of primarily commercial real estate loans, assets, and securities. RCM acquired and assumed management of approximately $4.7 billion in unpaid principal balance (UPB) of nonperforming and distressed assets from nine different sellers during 2010-2011.

Two initial portfolios totaling more than $3 billion in UPB, purchased in February 2010 in partnership with the FDIC, were an aggregation of more than 5,500 distressed loans from 22 different failed banks taken over by the FDIC. To date, more than 560 loans have been resolved and another 1,650-plus loans, representing $1.5 billion in UPB, have been foreclosed and are now REO or were subsequently sold.

During 2010-2011, RCM acquired an additional $1.7 billion in UPB representing more than 1,600 distressed loans and REO assets, either on balance sheet or within the fund, through negotiated transactions primarily with regional banks. The subject collateral was acquired from third-party originators between February 2010 and 2011.

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