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CRE Finance World, Summer 2013

A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 65 Chart 19 Value Decline and Property Type It seems plausible that this relationship will prevail in the coming years, as certain property types tend to exhibit more cash flow volatility than others. In our opinion, this also presents an argument that, on average, loss severities will decrease in the legacy CMBS as cash flows of many of the underlying loans in the CMBS universe are actually beginning to grow again. Chart 20 NCF Change Over Time If this trend continues, it will go a long way to mitigate upcoming losses expected from loans currently at the special servicer, and those that will be transferred from 2014 to 2017. This statement must be tempered by loan-level considerations. For example, office leases that were signed at the top of the market in 2005 through 2007, and which tend to be five to 10 years long, may end up resetting to lower rates due to less favorable market conditions for the landlord, thus putting downwards pressure on cash flow right when the properties need it most. In addition to cash flow improvement, the amount of time that a loan seasons before its transfer to the special servicer is an indicator in the value decline that is experienced. In our data set, loans that had seasoned before their loss had higher recoveries due to better liquidation prices. This relationship holds true when controlled for vintage. Seasoning generally equates to greater amortization, and also for survivor bias. Chart 21 Value Decline and Loan Seasoning The benefits of survivorship may be even more relevant for the outstanding legacy loans as they have survived one of the most stressful economic periods in history. In addition to having more amortization (where applicable) and time for cash flows to grow or stabilize, these survivors proved that they were able to weather extremely adverse economic conditions. However, on the other side of that coin is the question of whether seasoning will play the same role as it has: interest-only loans from the 2005, 2006 and 2007 vintages, in particular, were abundant and will deserve special scrutiny to see whether there is as much benefit to their seasoning as there has been for earlier vintages, which were largely comprised of amortizing loans. One guess is that the seasoning will be muted by the refinance risk they will face. Value declines only represent one component of CMBS loss, the other being the expenses related to the workout and liquidation of the loan. Anatomy of a Loss


CRE Finance World, Summer 2013
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