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Two Big Deals To Reshape Commercial Mortgage Servicing Arena

Orix Selling Off $1.3 Billion Specially Serviced Portfolio; KeyCorp Acquiring Bank of America CRE Loan Servicing
May 17, 2013
Two big deals last week will reshape the commercial mortgage servicing arena and likely affect the outcome of billions of dollars in properties.

CMBS special servicer, ORIX Capital Markets LLC, hired two firms to place $1.3 billion of defaulted commercial mortgage loans up for auction. The auction, which includes a mix of CMBS loans and non-CMBS loans, represents a significant portion of the $1.6 billion (108 loans) Orix currently has in special servicing.

And separately, KeyBank Real Estate Capital agreed to purchase certain commercial mortgage servicing rights from Bank of America. In connection with this agreement, KeyBank has also agreed to acquire Berkadia Commercial Mortgage's CMBS special servicing business. As a result of the two agreements, KeyBank Real Estate Capital stands to become the third largest named servicer of commercial/multifamily loans in the U.S.

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Orix Capital Markets

After meeting with Orix last week, Fitch Ratings analysts said they were encouraged that Orix views the pending auction as an "opportunity to test the market" and not, as some investors feared, a fire sale.

Orix indicated that note sales would likely not occur unless sale proceeds achieve equal or higher recoveries than alternative strategies on an NPV basis. Orix also indicated it was obtaining updated appraisals for a portion of the assets, the results of which may impact ultimate release prices.

Fitch analysts said the sale raised concerns surrounding the company's future commitment to special servicing. Orix indicated, however, if a sale is completed in its entirety, it expects to retain control of a majority of its named specially serviced transactions.

According to a news report from Commercial Real Estate Direct, the assets are being offered through CBRE and Mission Capital Advisors. CBRE has packaged 57 assets with a book value of $1.3 billion that it plans to sell on May 20.

Mission Capital is offering 41 assets with a balance of $205 million, and it plans to take bids starting May 21, with a best-and-final round to be held on June 11.

According to Nomura Securitized Products Research, the following three sets of assets from CMBS LBUBS 2007-C2 will be included in the sales:

Bethany Maryland Portfolio II, $185 million. Orix took title to the Bethany Maryland Portfolio II loan in September 2012. Collateral for the loan consists of three apartment complexes located in Maryland. Two complexes, Coopers Crossing Apartments and Henson Creek Apartments, are in the Washington, DC, area; while the third, Seasons at Bel Air Apartments, is 30 miles northeast of Baltimore.

One Alliance Center, $165 million. Orix took title to One Alliance Center in March 2013 when Tishman Speyer decided to transfer the asset to the lender. The asset was first sent to special servicing in May 2010, when the borrower requested a restructuring due to cash flow issues. At securitization, S1 Corp. leased 33.4% of the building, but had already vacated its space. At the time, 74,360 square feet of the 184,785 square feet was subleased.

Duke Cleveland East Suburban Portfolio, $133 million. This portfolio consists of eight office buildings near Cleveland, OH, ranging in size from 86,000 square feet to 160,000. The loan was transferred to special servicing in July 2011 after went into default. At the time, the portfolio was 80% occupied.

KeyBank Real Estate Capital

Meanwhile KeyBank announced it will purchase substantially all of Bank of America total commercial mortgage servicing portfolio of $110.5 billion. The transaction also includes a CMBS special servicing portfolio of about $14 billion. This portfolio also includes servicing for a variety of private investors.

The transaction does not impact Bank of America's Commercial Real Estate Banking business. Upon completion of this transaction, KeyBank's commercial mortgage servicing portfolio will be among the top three largest named servicers of commercial/multifamily loans in the U.S., with a servicing portfolio of approximately $205 billion.

On a pro forma basis, after closing the agreements with Bank of America and Berkadia, Key will be named special servicer on $47 billion of CMBS, making Key the fifth largest CMBS special servicer.

Completion of the agreements with Bank of America and Berkadia are subject to obtaining any required consents from certain investors, rating agencies and regulators.

Simultaneously, KeyBank has entered into a long-term sub-servicing agreement with Berkadia Commercial Mortgage. Under this agreement, Berkadia will act as sub-servicer on all CMBS primary servicing acquired from Bank of America.

As a result of the deal, Berkadia Commercial Mortgage becomes the largest fee-for-services provider in the industry with approximately $75 billion in asset value added to Berkadia's existing servicing portfolio.

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