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"Capital will remain abundant for new mortgage investment in 2003, but we anticipate [10 percent] less mortgage volume next year due primarily to the cyclical low in loan maturities." --Jeanette Rice, principal, research at Lend Lease Real Estate Investments.

Commercial Mortgages Continue to Weather Stormy Economy

CMBS Still Going Strong Despite Higher Delinquencies, S&P Says
Downgrades Tip the Scales in Second Quarter CMBS, Moody's Says
Fitch: CMBS Loans Resolved Without Losses

Legislative Update
Fitch Looks at May Department Store Exposure
Commercial Briefs
Commercial Servicing, Outsourcing Headline Discussion in Audio Conference

L.J. Melody Arranges Financing on Wachovia Tower

MBA Addresses Basel II International Accord

SMART Docs Run Across All Industries

GMACCM Hires Away Holliday Originators for Boca Raton Office

MBA Comments On Proposed FAS 140 Amendment

At the same time, 101 tranches had their ratings affirmed.

"Second quarter rating actions were weighted toward downgrades by a ratio of 1.44 downgrades per upgrade," Philipp said. "As the real estate markets work their way through the current downturn, Moody's expects the downgrade to upgrade ratio will run from balanced to slightly in favor of downgrades for at least several more quarters."

Philipp also said that investor credit risk on A-B note structures shows investor credit risk ties mostly to the size of the A note, but the default risk of the loan ties to the size of the B note.

A recent example of the problem occurred with a Northstar loan in
Comm 2000 FL-2. In this instance, the trust portion of the loan had a
Moody's loan-to-value (LTV) of 90 percent, but the B note/total loan had an LTV of more than 100 percent. As a result, the B-note was not able to refinance after exhausting all of its extension options, Philipp said.

Moody's also expects growth in building expenses to continue and exceed growth in rents. In Moody's Red-Yellow-Green test, market rents scored a national average of yellow, or caution, for the major asset classes.
 
"Rents in many markets have been flat to down and are likely to remain so for the near term," Philipp said.

However, the rating agency said that expenses for items such as taxes, utilities, and insurance have been rising faster than inflation, and the result has been a number of borrower operating statements with a drop in net-operating income for the 2002 calendar year.

"We have also seen net income squeezed in office properties," Philipp said. "With municipalities looking to close budget gaps by raising real estate taxes and the higher cost of insurance post 9/11, office building expenses have been on the rise."

Borrowers could pass on the expenses to in-place tenants for now but as leases start to expire, landlords are likely to absorb much of the increases, Philipp said. 

Meanwhile, hotel-only deals increase but continue to struggle as revenue per available room (RevPAR) dropped below 1998 numbers. Five hotel-only CMBS transactions took place in the first half of 2003 compared with one in 2002.

"We expect that the issuance of hotel-backed CMBS will continue into the second half of 2003, Phillipp said. "Despite the somber statistics, the CMBS sector saw a dramatic increase in the number of hotel-only pools in the first half of 2003, and Moody's anticipates continued interest in this asset class for the rest of the year."
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Fitch: CMBS Loans Resolved Without Losses
MBA (8/7/2003) Murray, Michael

More than $241 million in reported loan balance losses for U.S. commercial mortgage-backed securities (CMBS) were resolved in 2002, with 55 percent of resolutions resulting in no realized losses, according to a new report from Fitch Ratings Service, New York City.

The losses in 2002 represented 21 percent of the original total balance of the resolved defaulted loans, according to the Fitch report, “2003 CMBS Loan Loss Study .”

Mary O’Rourke, senior director with Fitch Ratings, said that more than 228 defaulted loans were resolved and that losses pose “no threat” to investment grade U.S. CMBS.

“As of year-end 2002, the overall dollar losses in all CMBS transactions included in the study amount to only .17 percent of the total collateralized loan balances in Fitch-rated conduit, large loan and fusion CMBS transactions,” O'Rourke said. “Fitch expects losses by year-end 2003 to remain under .20 percent of the total conduit collateral, an amount insufficient to impact CMBS investment grade classes.”

For the second year in a row, the Fitch report noted “striking differences” in realized losses experienced by loans resolved through a servicer-negotiated discounted payoff (DPO) vs. loans that become real estate owned (REO). While REO loans had an average loss severity of 64.3 percent and took 23.4 months to resolve, DPO resolutions resulted in an average loss of 28.9 percent, with an average of 11.9 months to resolution.

“DPO resolutions are less likely to be available as an option on collateral that is older, obsolete or in a declining market,” O'Rourke said. “There is a strong relationship between the length of time a loan is in special servicing and the size of the realized loss.

O’Rourke said loss severity greatly increased after 24 months in special servicing to an average of 62.2 percent. By comparison, the loss severity of loans resolved in less than 12 months averages 30.5 percent.

The study focuses on the cumulative total of 144 CMBS loans that experienced losses, out of a universe of 29,542 loans. Hotel, retail and multifamily loans dominated the group of loans with losses, representing more than 80 percent of both the total losses and total number of loans.

Loss severity was highest in retail loans, with an average severity of 46.6 percent, Fitch said. When the loans were grouped by state laws that require judicial intervention in foreclosures vs. those states that do not, Fitch found “no significant difference” in either the time it took to get to resolution or in the severity of the loss experienced.

Nearly 70 percent of liquidated loans had original balances under $5 million, the report said. Just four loans greater than $25 million experienced losses, with the average loss being 32.8 percent. Loans under $5 million had an average severity of 45.6 percent.

Click here to view the report is available on the Fitch Ratings web site at 'www.fitchratings.com.'
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Hagel's bill would move the current GSE regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), from HUD to the Treasury Department and rename it the Office of Federal Enterprise Supervision (OFES). Among other things, OFES would oversee the GSE's mission, safety and soundness, and have the authority to regulate the amount of assets and new activities sought by Fannie Mae and Freddie Mac.

As we have reported, Rep. Richard Baker's, R-La., bill, which he introduced in the House in late-June, would move OFHEO to the Office of Thrift Supervision (OTS), which is part of the Treasury Department, and rename it the Office of Housing Finance Supervision. Hagel's bill would not fold the GSE regulator into OTS.

MBA is preparing an analysis of Hagel's bill, which will be made available in the near future.

For more information, contact Chris Harrington at 202/557-2863 (christine_harrington@mbaa.org).
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Fitch Looks at May Department Store Exposure
MBA (8/7/2003) Murray, Michael

After the May Department Stores Company announced last month that it intends to divest 32 Lord and Taylor stores, Fitch has examined May's exposure in U.S. CMBS transactions for the stores slated for divestiture.

Fitch, in a statement released this week, said it does not believe that the divestiture will negatively impact any of the transactions with Lord and Taylor exposure.

Also, May indicated that it would continue to fulfill its lease obligations to operate each store until arrangements can be made to divest the location, alleviating concerns over potential dark anchor spaces tarnishing the general appeal and leas ability of the affected malls, Fitch said.
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Commercial Briefs
MBA (8/7/2003) Sorohan, Mike

The energy bill passed last week by the Senate includes a provision, supported by elements of the real estate finance industry, that would allow owners of renovated or newly developed commercial buildings to deduct up to $2.25 per square foot for work that improves the property’s overall energy efficiency rating.

The Senate version, H.R. 6, is virtually identical to a bill that passed the Senate last year when Democrats controlled the body. The House version of the energy bill, (H.R.1531), does not contain the provision.

 ****

Sen. Orrin Hatch, R-Utah, introduced a bill that would allow property owners to deduct leasehold improvement and building security equipment costs beginning immediately and continuing through 2006.

S. 1475, the "Promote Growth and Jobs in the USA Act of 2003," would build on the 50 percent depreciation bonus for leasehold improvement and building security equipment costs that were enacted under this year’s economic stimulus package, the Real Estate Roundtable reported. A House version, introduced by Rep. Bill Thomas, R-Calif., would extend the current 50 percent depreciation bonus through 2005 and permanently shorten the leasehold improvement depreciation period from 39 to 20 years, the Roundtable reported.

"By building on the incentives we passed in last year's stimulus bill and this year's growth bill, we can get capital spending moving again. This will lead to higher productivity and higher wages," Hatch said at a news conference.
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Commercial Servicing, Outsourcing Headline Discussion in Audio Conference
MBA (8/7/2003) CMF NewsLink Staff

Come join other MBA members in a live audio conference on Wednesday, August 20th, from 3:00 p.m. to 4:00 p.m. Eastern, called “Outsourcing and Off-shoring in Commercial Servicing.”

MBA members, Ann Hambly, Chair, MBA’s Commercial Real Estate/Multifamily Finance Board of Governors (COMBOG) and Vice President, Prudential Asset Resources and John Church, Managing Director, Wachovia Securities, will discuss the impact and value of outsourcing.

As the servicer’s job responsibilities increase, outsourcing becomes an increasingly popular business solution to overhead and compliance concerns in the servicing arena. 

Outsourcing provides an opportunity to hire a third-party company as a specialized work force trained in the assigned task.  However, there are growing concerns among servicers and rating agencies about vendor oversight, external customer service and maintaining control over the entire servicing process.  In addition, some of the outsourcing companies are based overseas, complicating due diligence.

Interested in learning more?  Visit CampusMBA website at http://www.campusmba.org/ (click on Live Audio Programs).
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“Deutsche Bank helped us expedite the loan," said Greg Katz, senior associate at Sterling American. "As it relates to financing, our investment strategy is to lock in rates, and not take interest rate risks. This is particularly the case in today’s favorable interest rate environment.”

Wachovia Tower – formerly known as First Union Tower – was the first acquisition of Fund IV, Sterling American’s newest real estate investment fund, said Robert Watman, vice president of acquisitions at Sterling American.

The property was acquired from a European institutional owner on December 27, 2002 by Sterling American and its Joint Venture Partner, Continental Real Estate Companies (CREC) of Miami, Fla. CREC also manages the property.

Katz called Wachovia Tower, built in 1983, a core location nearby the city’s courts and other municipal buildings. It is currently 90 percent occupied.

Although the financing took place this year, the acquisition was completed in the final days of 2002 because the seller needed to close the deal by the end of the year.

"We became involved around Thanksgiving Day and realized that to make this deal happen, it would have to be an all-cash transaction [and] financing would have to wait until 2003," Watman said.
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The ANPR was published on August 4, 2003 by the four federal bank and thrift regulatory agencies and requests comment on two interagency documents related to the proposed implementation of the new Basel Capital Accord in the United States.  The ANPR was issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision.  The deadline for comments on the ANPR is November 3, 2003.

In a July 31 letter to the Basel Committee on Banking Supervision, the international body charged with revising global banking guidelines, MBA commended the Accord’s use of standards that can be flexibly interpreted by banking authorities at the national level.  MBA cautioned, however, that the risk rating system proposed under the current draft of Basel II assigns excessive risk weights to certain commercial real estate development transactions.

“While MBA supports the flexibility of the Basel framework, we believe that risk weights recommended for some commercial real estate loans are inconsistent with historical default data,” said Leanne Tobias, MBA’s director of commercial real estate finance. “To ensure that adequate banking capital is available for commercial real estate, MBA has recommended that loans be moved to lower-risk categories where appropriate. We’ve appreciated the chance to submit comments to the Basel II Committee, and will be developing additional comments for U.S. banking authorities under the new ANPR.”

The July 31 MBA letter points out that loans for the development of single-family housing have default rates well below other types of commercial real estate, and suggests that one-to-four family land acquisition, construction and development loans be assigned lower risk weights.   MBA also recommended that banking regulators at the national level be permitted to consider credit enhancement vehicles that have proven to be effective in decreasing risk when assigning risk weights.

MBA concurs with a recent change in Basel II that national banking authorities be permitted to reclassify as lower-risk certain land acquisition, construction and development loans for commercial real estate that has been pre-sold or significantly pre-leased.  “Presale or significant pre-leasing to credit tenants substantially reduces project risk, and should be recognized in establishing capital set-aside requirements for banking institutions,” Tobias said.

In its July 31 letter to the Basel Committee, MBA also suggested that the final Accord establish preferential risk weights—or permit national banking authorities to do so—for all commercial loans rated “Good” or better which utilize exemplary underwriting standards, practices and technologies.  MBA's recommendation is based on several recent studies that document significant declines in commercial real estate default levels since the mid-1990s, a period that corresponds to the use of enhanced underwriting standards, practices and technologies.   

“Commercial real estate underwriting has improved materially during the past decade due to the influence of the capital markets, the establishment of improved valuation standards, and the wide-spread adoption of lease-based underwriting software,” Tobias noted.  “Together, these developments have encouraged more sophisticated evaluation of commercial real estate credits.  MBA favors a Basel framework that would permit incentives for lenders who use the best possible underwriting technologies, standards and techniques.” 

Click here to read July 31 comment letter on the Basel II standards.  For more information on the Basel II standards or MBA’s comment letter, please contact Leanne Tobias at leanne_tobias@mbaa.org.
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Hoffmann, Bozzacco and Hoppenstein came to the company from Holliday Fenoglio Fowler’s Boca Raton office where they were primarily responsible for originating debt transactions throughout the southeastern United States.  During their time with Holliday Fenoglio Fowler, the three completed more than $1.6 billion in commercial real estate transactions. 

AEW Capital Management, Boston, Mass., named J. Hall Jones, Roman Ranocha and Jeffrey Caira as assistant portfolio managers. They will help manage the firm’s real estate equity securities portfolio and support property sector and company coverage responsibilities.  Caira previously worked as the portfolio manager for the Pioneer Real Estate Shares Fund.

CWCapital, Needham, Mass., appointed Michael Murphy to senior vice president and southwestern regional manager. He will manage CWCapital’s Fannie Mae and commercial conduit production and build the staff to lead CWCapital’s expansion in the southwestern U.S. He will also oversee operations in Austin, Texas, and Dallas, Texas. Murphy has 20 years of experience in the real estate finance industry, including as senior vice president and western regional manager for CWCapital’s San Francisco, Calif., office.

Red Capital Group, Columbus, Ohio, has hired Alison Kerr-Hull Colvard as a vice president and tax credit originator. She has more than 11 years of experience in acquiring and developing affordable multifamily housing, including serving as vice president of development for an affordable housing developer. She is responsible for originating low- income housing tax credit investments and other housing transactions, as well as expanding Red Capital Group’s origination tasks in the southeast.

The NHP Foundation, Washington, D.C., has named LaSalle Leffall, III as COO. He will oversee NHPF’s daily operations and direct asset management, refinancings, acquisitions and dispositions, resident services and finance and administration. He previously served as NHPF’s executive vice president.
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In a July 31, 2003, comment letter to FASB, MBA expressed concern that the proposed amendment of FAS 140 could have “unintended, adverse consequences” for CMBS and other MBS issuers.  MBA noted, for example, that proposed prohibitions against transferors entering into financial guarantees -- including commitments to make unrecoverable servicing advances and to replace or repurchase loans under standard MBS representations and warranties -- would deny QSPE status to the securitization vehicles to which loans are transferred in most “private label” residential and commercial mortgage securitizations.   As a result, lenders could be required to treat these transfers as financings instead of sales by maintaining the loans on their books.  This would cause lenders’ financial statements to be “grossly misstated”, according to MBA’s letter. 

To forestall this potential problem, MBA has recommended that the FASB modify the proposed amendment to clarify that the term “financial guarantees” excludes: (1) servicing advances made under guaranteed mortgage securitization programs; (2) standard representations and warranties that provide assurances as to the quality of an asset at the transfer date; and (3) interest advances made under a private label mortgage securitization program that are deducted from servicing fees.

 MBA’s letter also recommends that the FASB revise the proposed amendment of FAS 140:

* To clarify that QSPEs may hold equity instruments that it receives after the transfer date;

* To clarify that QSPEs may hold passive derivative financial instruments entered into with the transferor, its affiliates and agents provided those parties could never regain control of the transferred loans under the terms of the derivative contracts.

Click here to read the MBA comment letter. For more information on MBA’s position on the proposed amendment of FAS 140, please contact alison_utermohlen@mbaa.org.
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About MBA Commercial/Multifamily NewsLink Publisher: Cheryl Crispen, Senior Vice President - Communications and Marketing Editor. Electronic Publications: Mike Sorohan 202/557-2855 michael_sorohan@mbaa.org Editor, MBA Commercial/Multifamily NewsLink: Michael Murray 202/557-2851 michael_murray@mbaa.org Advertising Opportunities: Bill Farmakis 203/966-1746 bill@jlfarmakis.com MBA Commercial/Multifamily NewsLink, a daily electronic publication, is free to you as an employee of an MBA member company. For membership information, visit MBA's website at www.mortgagebankers.org/membership (Back To Top )

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