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CRE Finance World, Summer 2013

that. When we had fewer B-piece buyers who wanted the traditional sense of the fair-market value purchase option, or didn’t want caps on special servicing fees, we tried to build a lot of that into the structure. However, when you have two bidders in the market saying “look at this deal, this deal didn’t require it, they didn’t have caps,” or whatever it was, it’s hard to keep that in. We’ve managed to, but again they look at every deal and say, this deal didn’t get it and they’ve cleared the market fine, so what do you care? We care because we want to continue with transparency and want any and all fees disclosed. We don’t want conflicts of interest or certain parties getting enriched. We want to incentivize them to restructure or work out a loan where necessary, but some of the issues that had come out of the past we are seeing coming out right now and we are trying to fix a lot of that. Jon Strain: The investment banks are operating under the specter of the regulatory regime of Dodd-Frank and what the fully documented rules will look like. So we are all not looking to compete on those structural aspects. Back to what Matt said, I do think we are probably all competing on price and credit, credit being LTV basically, and price being spread. I don’t feel like CMBS trusts, the B-piece buyers, are competing so specifically to gain back the fair value purchase option or dilute the power of the Operating Advisor. The CREFC forums have spelled out what are best practices and I feel people are generally trying to stick to those. I don’t feel any pressure to diminish or dilute the documentation. Lainie Kaye: You may not feel pressure but you are getting it from some of B-piece bidders that are saying deals that were done before us, “Look it didn’t have this structure.” We’re holding on to it to the extent that we think it’s the right decision. Matt Salem: From Rialto’s perspective, I would argue that the vast majority of pooling and servicing agreements feel pretty static to me. Around the edges there may be some tweaks that any B-piece buyer, special servicer, or master will want to make. When we go into a deal we are really thinking about credit and price. We are not thinking about what is the role of the Operating Advisor. We may have an opinion there but I don’t think we are trying to change anything whole sale. They are very small changes. I think CREFC has done a very good job trying to set industry standards, get them out in the market and have people socialize and accept them, and we try to follow those as much as possible. CRE Finance World Summer 2013 14 Paul Fiorilla: One of the big concerns of CREFC going forward is regulation. B-piece buyers will arguably be impacted the most by the proposed risk-retention rules, which as currently proposed will require them to hold the bottom 5% of deals by proceeds for five years. The regulations are still being written and amended, but if passed as currently written, how does that affect B-piece buyers? Sam Chang: It comes in two folds. One, how long you have to hold the B-piece and two, the amount you have to purchase. Depending on what kind of capital an investor has, that time period could be potentially painful. Most of Torchlight’s capital is long term, so it is not as painful because the holding period by itself doesn’t scare us. But then again if there is a potential credit situation or a reason to sell because of a strong market bid, then it could hinder our return and our responsibilities to investors if we wouldn’t be able to sell. The second part of risk retention is the amount that we’d have to buy to reach 5% of proceeds. The variations on what that implies are tremendous because that means we have to buy well above the B-piece into the BBB and maybe even into the single A or higher. Then the question becomes at what level are these additional bonds purchased? If you have to buy the bottom 5% at market levels for those classes, then it wouldn’t work in B-piece funds because the diluted yield would be just too low. If you bought all those classes at B-piece yields, then it would harm the profitability of the issuers, and then the question becomes what happens to that additional incremental cost to the issuers? There are a lot of variations on how these issues can be tackled, whether B-piece buyers can team up with another investor who can take down the classes above the B-piece at today’s market yields or if the issuers want to pass on the additional cost to the borrower by charging a higher coupon or by blending a mezz loan with a conduit loan to get a blended loan at a higher coupon. Paul Fiorilla: Jon, are you worried about those incremental costs, or is it too early to say how it’s going to shake out? Jon Strain: It’s hard to plan for but we are fortunate to have the B-piece exemption. While the rule seems to be changing or fluid, the market has an amazing way of adapting to whatever results. I think if the B-piece were to be double in size, it would change the CRE Finance World Roundtable: The B-piece Buyer


CRE Finance World, Summer 2013
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