Long Island Marriott Loan Moves into Special Servicing

Hurricane Sandy may have given a final push into special servicing to the $103.5 million Long Island Marriott and Conference Center hotel loan.

After “a lengthy period of weak cash flows,” Fitch Ratings reports the Long Island Marriott and Conference Center hotel moved into special servicing.

According to the servicer watchlist commentary, Barclays analysts note, the property received some roof damage from Hurricane Sandy. But “given the weak underlying performance,” it is unclear if this pushed it into special servicing.

Analysts argue that securitized in JPMCC 2007-LDPX, the loan performance had been struggling since 2010.

They credit the borrower for supporting debt coverage shortfalls to help the loan remain current during the past years.

However, the loan was underwritten “using pro forma assumptions based on” required $22 million upgrades to the property that should have been completed in 2008.

Despite property upgrades and borrower efforts ultimately the loan performance did not improve.

Going forward, given its large size and the willingness of the borrower to contribute capital to the property “by covering debt service shortfalls,” analysts said, the loan may be a candidate for modification.

The challenge when modifying a loan of this size, they explained, is the need to implement “substantial payment reductions through an A/B split and/or interest reductions” that will help improve the debt coverage.

In addition, Hurricane Sandy related damages and unfinished upgrades or other market factors negatively affecting the value of the property, there may be an appraisal and subsequent appraisal reductions.

Analysts warn the risk of such appraisal changes can be significant if the borrower stops supporting debt service shortfalls. In other words, property value changes could push shortfalls that “are currently hitting the D tranche” to go higher.