NEW_YORK, May 26 IFR)-assessments of property increasingly more aggressive, say "incentive management fees" for the properties of the hotel and return limited subscription "pro forma" are some disturbing trends that Standard & Poor cites as red flags in renewal rapidly evolving mortgage commercial security market.
In a report released earlier this week, Standard & Poor identifies several emerging trends - and a return to debatable "old" trends - recent CMBS transactions. United States CMBS market experienced "fairly rapid change between late 2009 and early 2011, as single-borrower is place in a market characterized by relatively larger and more complex multi-borrower transactions", wrote them the rating agency. Several structural characteristics were relaxed, while some evaluations of property are too optimistic, wrote the S & P.
"We continue to see where we believe that assessments are debatable, especially in the larger loans for certain types of goods, particularly the Office and hotel, on the primary markets, instances," wrote the S & P Credit Analyst James Manzi. "It's probably due to the fact that the loans are very competitive in these types of markets where insurance companies, pension funds, foreign investors and REITs can bid on the sides of the transmitters of BGT."
"The part which we believe should be more worrying for investors is that assessments appear to be building upside in rents and occupancy to arrive at a value for the properties in question instead of use of rents in place and rental at closing"manzi."added".
S & P also cited many examples of a limited return of subscription pro forma. According to S & P, the expression "pro forma" indicates that some aspects of the subscription for an indirect property loan is based on the occurrence of an expected (future) event, as a planned increase of rents or the assumption that a tenant would be take a currently vacant space and begin to pay the rent.
Most of the loans reported by S & P have rental or occupancy problems. For example, a loan on shops drive in Aventura, outside of Miami, was in the JPMCC 2010-C2 CMBS transaction, and the assessment of the property reflects a so-called "stable value", which means that the evaluation used some assumptions about future incomerather than realistic "as-is" value.
In the case of Boardwalk stores, although a lease has been implemented at the close of a tenant, Nordstrom Rack, space was vacant at the end, and no rent was payable until the property was occupied. "While scenarios like this may not be ideal, they are less risky, in our view, that the scenarios in which loans assume a significant increase of rents or occupation in their term, as was the case with many loans pro forma effected during the years of peak"Manzi has written."."
S & P also noted that several agreements of BGT 2011-vintage include accommodation, hotel loans or, in their top 10 loans. The sector is generally regarded as the less stable than other major commercial properties types, mainly because hotels reset their daily room price.
But what is most disturbing is a structural twist that S & P cites on a loan from the hotel (Marriott Crystal Gateway in Crystal City, Virginia) in operation DBUBS 2011-LC1 BGT relating to a so-called "management fees" by Marriott incentive.
Details of the terms for the transaction sheet show that Marriott rights were superior to the payment of services so-called debt to the lender, which is very unusual, said S & p and "take a significant cash flow part net when it happens."the analysts wrote. "As such, should be to assume a significant increase in revenue per available room (hotel) (called"Revpar") to compensate for it.".
Manzi said that in the estimation of S & P, daily average hotel room should increase approximately 30% to maintain the latest leak 12 months net cash flows, assuming that the tax increase has happened today.
The rating agency also noted there were more than ready to recent transactions with a single-tenant exposure, which is typically riskier than buildings with alignments tenant vast and diverse. In addition, several loans top 10 in these recent CMBS offerings are based on leases expiring before the expiry of the loan. In this situation, there is always the risk that the tenant will not renew There are lot of time and costs of replacement of a tenant default or main if she leaves.
S & P said it also looks to other trends including: an increase in the number of loans interest only partial-term, a weakening of the "remedy carve-outs" for fraud and bankruptcy and an increase in the complexity of deal structure, measured by the number of classes of transaction bonding.
(Adam Tempkin is senior analyst IFR)
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