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CMBS Market Heats Up, So Too Do Credit Risks

Four New CMBS Deals Being Readied; Bond Agency No Longer Promising Top Ratings Going Forward
March 21, 2012
The CMBS market continued to heat up this week as securitization firms rolled out four new offerings totaling more than $3 billion. Those deals are in addition to three offerings totaling $2.67 billion that sold earlier this month.

The offerings are another sign of a relaxation from the extremely tight credit conditions that smothered investment activity following the Great Recession, according Moody's Investors Service. At the same time, the newest round of securitizations in general are also raising credit risks, the bond rating agency said. Relaxed underwriting standards, more complex structures, and the entrance of new untested market participants have led to the risk increase.

While the riskiness of securitizations is still low compared to the level it reached in what is now generally considered the bubble years of 2006 and 2007, the signs of credit easing in originations are evident in a number of asset classes that have traditionally backed securitizations: autos, credit cards and commercial and residential property, Moody's said.

"While this increased risk is not unusual for this phase of the credit cycle, investor protections built into transactions must keep pace with these developments," said Claire Robinson, Moody's managing director. "In some instances, that increased risk has not been adequately mitigated to support the high credit ratings that securitization sponsors desire."

"These developments indicate that a more robust securitization market is emerging, with investors more willing to fund non-traditional assets and issuers," Robinson said. "Not all of these transactions will merit top Moody's ratings, however. We expect that we may assign more low to mid-investment-grade ratings to these non-traditional transactions."

Freddie Mac Offering Certificates Backed Only by 5-Year Multifamily Mortgages
Freddie Mac is expected to price $1.1 billion in K Certificates (K-501) backed exclusively by multifamily mortgages with a five-year term. The company expects the offering to price the week of March 19, 2012 and settle on or about April 11, 2012. This is Freddie Mac's fourth K Certificate offering this year.

The K-501 certificates include two senior principal and interest classes, two senior interest-only classes and a junior interest-only class. Rating agencies Moody's Investors Service Inc. and Morningstar Inc. have been engaged to rate the four senior classes of K-501 Certificates, which are each expected to receive a rating of "Aaa(sf)" and "AAA", respectively, subject to on-going monitoring.

The mortgage pool contains 50 loans backed by 50 properties. Seventeen of the properties are in Texas.

CBRE Capital Markets Inc. originated 15 of the underlying mortgage loans, collectively representing 24% of the initial net mortgage pool balance. Se

The three largest loans in the pool are as follows:

$79 million on Orsini II, a 566-unit complex in Los Angeles. PNC Bank originated the interest-only loan on the midrise complex at 550 N. Figueroa St.
$53.74 million on Point at River Ridge, a 466-unit complex in Ashburn, VA. Point at River Ridge is one four sponsor-related loans on properties in Northern Virginia. The other three are: Point at Dulles, Point at Bull Run and Point at McNair Farms; collectively the four representing 13.9% of the initial mortgage pool balance and all are among the 12 largest loans in the pool. Centerline Mortgage Partners originated the loans. Point at River Ridge is interest only; the other three are partial interest-only.
$51.26 million on Rockledge Apartments, a 708-unit complex in Marietta, GA. Jones Lang LaSalle Operations originated the loan.

Wells Fargo, Royal Bank of Scotland Team On $925 Million Deal
Wells Fargo Bank and The Royal Bank of Scotland are the primary loan originators behind WFRBS Commercial Mortgage Trust 2012-C6, a $925 million CMBS conduit transaction collateralized by 89 commercial mortgage loans secured by 152 properties.

The loans have principal balances that range from $1.5 million to $76.5 million for the largest loan in the pool, which is secured by National Cancer Institute (NCI) Center, a research & development facility in Frederick, MD. The property is 100% leased to SAIC-F a Fortune 500 company. The lease has two, 10-year extension options available, however. While SAIC-F is the actual tenant, the facility was built for National Cancer Institute, and the lease payments are funded by the U.S. government.

The underlying properties are located in 30 states. There is significant exposure in California, however, with 29.2% of the properties located there. The next highest geographic concentration is in Texas at (12.5%). Almost two-thirds of the California concentration is represented by the top 10 loans, including 18 of the 26 self-storage properties that serve as collateral for the WPC Self Storage Portfolio, the third largest in the pool. Wells Fargo funded the $48.2 million first mortgage loan to facilitate the acquisition of 26 self-storage properties in four states (CA, IL, HI, and TX). The sponsor of the loan is Corporate Property Associates 17-Global Inc., a non-traded REIT managed by a wholly owned subsidiary of WP Carey (WPC).

Wells Fargo provided the second-largest mortgage loan in the amount of $68.2 million that is secured by fee simple interests in four full service hotel properties. The portfolio is comprised of 901 keys, and includes the following properties: Embassy Suites Las Vegas Convention Center, NV (286 keys); Embassy Suites Arcadia, CA (190 keys); Embassy Suites Alpharetta, GA (150 keys); and the Renaissance Asheville, NC (275 keys). The loan proceeds were used to retire a former CMBS loan that was securitized in GMAC 2005-C1 and had been transferred to the special servicer. That loan experienced a maturity default as it was not successfully refinanced or extended when it came due. The proceeds were used to retire $101 million of debt and the new financing included a $37 million preferred equity contribution by CB Richard Ellis Investors.

Restaurants Back Latest Bank of America CMBS
Bank of America and German American Capital Corp. co-originated a $324.8 million loan to a sponsor entity controlled by Bain Capital Partners and Catteron Partners that backs CMBS deal BAMLL-DB 2012-OSI.

The loan has a five-year term and matures in April 2017. The loan has both fixed- and floating-rate components and is secured by, among other things, cross-collateralized and cross-defaulted first mortgage liens on 261 restaurants in 34 states and are all master leased to an affiliate of OSI Restaurant Partners LLC.

The portfolio of brands consists of Outback Steakhouse, Carrabba's Italian Grill, Bone?sh Grill, Fleming's Prime Steakhouse & Wine Bar and Roy's Hawaiian Fusion. The collateral for this CMBS transaction consists of a sample of all brands, although it is largely made up of Outback Steakhouse and Carrabba's Italian Grill. There are also 10 assets tenanted by brands not owned or operated by OSI.

UBS, Barclays Readying Next Multi-Borrower Deal
Still in the premarketing stage, UBS Securities LLC or Barclays Capital Inc. are preparing CMBS deal UBS Commercial Mortgage Trust 2012-C1. While not in final form, the 10 largest loans that will likely make up the pool total $777 million.

The three largest loans are as follows:

The Dream Hotel loan is a $120 million, fixed-rate loan secured by the borrower’s fee interest in the land the Dream Hotel at 346 W. 17th St. in New York. The borrower/sponsor is affiliated with Standard Trust, which has more than $1 billion in reported assets with significant hospitality holdings, including five hotels in New York City, two properties in India, and one in Thailand. The borrower purchased the land and improvements in April 2006 and has spent $220.6 million to renovate the improvements and convert the improvements into a 12-story, 316-room luxury boutique hotel, including 16 suites. The Dream Hotel is managed by Hampshire Hotels and Resorts, an affiliate of the borrower.
The Civic Opera House loan is a $95 million fixed rate loan secured by a 916,039-square-foot Class B, CBD office property at 20 N. Wacker Drive in Chicago. The loan has a 10-year term and amortizes on a 30-year schedule. The Civic Opera House Loan accrues interest at a fixed rate equal to 5.883%. Loan proceeds, with an additional equity contribution of $49.4 million and a credit from the seller of $5.1 million, were used to acquire The Civic Opera House Property for a purchase price of $125.78 million, fund upfront reserves of $19.7 million, and pay closing costs and fees of approximately $4.1 million. The borrower, is affiliated with Michael Silberberg, a senior partner at Silberberg & Kirschner LLP, a New York law firm. Since 1988, Silberberg has privately invested, syndicated and managed commercial and residential multifamily projects across the country, and has participated in a number of private equity and loan transactions.
The Trinity Centre loan is a $160 million fixed rate loan secured by a 900,744-square-foot Class B, CBD office property at 111 and 115 Broadway in New York. The loan has a 10-year term, an initial interest-only period of 24 months and amortizes on a 28-year schedule thereafter. The loan accrues interest at a fixed rate equal to 5.8975%. The borrower is affiliated with Capital Properties, a privately owned real estate investment, development and management firm, and Saxon Partners, a Boston area developer.

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