Page 29

CRE Finance World, Autumn 2013

A publication of Autumn issue 2013 sponsored by CRE Finance World Autumn 2013 27 Table 4 CMBS Origination and Loss Statistics by Vintage ($billions) Source: Commercial Mortgage Alert, Moody’s Investor’s Service and Trepp, LLC Additionally, other highly specialized assets (or special use assets), such as casinos and land, while unusual in CMBS transactions, have not typically fared well in times of economic distress. Two floating rate loans come to mind from the CSMC 2007 TF2A securitization: Resorts Atlantic City (a resort casino loan in the amount of $175 million) and Biscayne Landing (a Florida land loan in the amount of $72 million). Resorts Atlantic City Biscayne Landing Resorts Atlantic City was a hotel/casino that was devastated by the financial crisis and has never recovered its footing. After going into default, the loan was deemed unrecoverable in 2010 and sold for $29 million. After repayment of servicer advances of $31 million (primarily for taxes), the CMBS trust experienced a realized loss of $177 million or 101% of the loan’s original balance. Biscayne Landing was the largest parcel of undeveloped urban land in South Florida. It was a public-private venture in cooperation with the City of North Miami with an intended eight-year development program. Following the financial crisis and the lack of demand for high-end development in the region, the borrower defaulted under its ground lease payments to the City of North Miami, its ground lease was terminated and the loan was liquidated, net of advances, for a 101% loss severity of original face. Clearly, not all assets are created equal, but cash flow remains the best driver of value and survival. All of these assets had highly volatile cash flows, or none at all. In a downturn, they were the first assets to default and suffer disproportionate losses. #2 — A Good Sponsor Does Not Always Equal a Good Loan Harkening back to the “Five Cs of Credit” (Character, Capacity, Capital, Collateral, Conditions), “Character” is often cited as one of the most important lending considerations. However, even the best sponsors are not immune from making bad investments and have a fiduciary duty to their partners (not the CMBS trust) to “walk away” from a loan if that is the most prudent financial course of action. Too many times, we have heard, “Oh, this is ‘XYZ Sponsor’, it has to be good.” Not true, especially in CMBS lending where nearly all loans are non-recourse to the borrower. Take for instance the Highland Mall ($61 million — JPMCC 2002- CIB4). Highland was a million square-foot enclosed regional mall in Austin, Texas sponsored by The Rouse Company and Simon Property Group and anchored by Dillards and JC Penney, among others. After losing its anchor tenants, the property became REO, ultimately being converted to a community college. Net of servicer advances, the loan ultimately experienced an eye-popping 120% loss severity, collapsing the classes “F” through “K” of the related CMBS trust. The sponsor (GGP as successor to Rouse/Simon) behaved in a financially rational way by not supporting the property and is thriving today. Similarly, the Oviedo Marketplace loan ($49 million — MSC 2005- HQ6) in Florida was ultimately selected by its sponsor (GGP) to be returned to its lender via a deed-in-lieu of foreclosure when the company emerged from bankruptcy. Again, GGP acted in a prudent fiduciary manner to its investors by abandoning this sub-performing asset, ultimately saddling the CMBS trust with a 108% loss severity, including advances. While sponsorship is critical to an asset’s success, without recourse and without restrictive transfer provisions (assuring that the sponsor you underwrote will be there tomorrow), it is foolhardy to expect a thoughtful sponsor to throw “good money after bad” and support a failed transaction. For CMBS underwriting, Collateral and Conditions trump Character. #3 — Beware of Servicer Advances As illustrated above, it is not just about the recoverable value of the asset, but also the servicing advances to get you there. Often, these costs and expenses (including advances, servicing fees, legal, etc.) are not factored into asset recovery calculations and can have a profound impact on loss severity. In an adverse or distressed transaction, 10% or more of the face amount of the loan may be required to be spent to generate any recovery. Losing More than Your Loan


CRE Finance World, Autumn 2013
To see the actual publication please follow the link above