Second CMBS Issued With Risk Retention Feature

The second commercial mortgage securitization designed to comply with risk retention is backed by a single loan on a Manhattan skyscraper.

Deutsche Bank provided the $254 million first mortgage on the property at 667 Madison Ave. The 10-year loan pays only interest, and no principal, for its entire term. It was used to defease a mortgage that was set to mature in 2007.

A $214 million portion of the loan was securitized in a deal, dubbed COMM 2016-667, that priced last week; the remaining $40 million strip will be used as collateral for a future offering of mortgage bonds.

COMM 2016-667M takes advantage of a regulatory concession, unique to the CMBS industry, that allows sponsors to outsource the requirement to hold on to 5% of the risk of deals. Prior to announcing the transaction, Deutsche Bank placed $16 million of Class E certificates, rated double-B by Standard & Poor's and DBRS, to a third party that will hold them for the life of the transaction.

By comparison, the first CMBS designed to comply with risk retention saw the three sponsoring banks — Wells Fargo, Bank of America and Morgan Stanley — retain the risk. Few other commercial mortgage lenders are in a position to use the same strategy, since it requires a large balance sheet.

Like Wells Fargo, Bank of American and Morgan Stanley, however, Deutsche Bank played it safe in terms of collateral. The property backing the loan was constructed in 1985 by a unit of Hartz Group, a private investment company holding interests in the real estate, oil, natural gas and financial management industries, and has remained under the same ownership ever since.

Nicknamed "the Country Club," it has 248,667 square feet of office space that commands rent of a weighted average $145.20 a square foot, nearly double the average for Class A office buildings in its submarket. There is also a half block of frontage on Madison Avenue totaling 16,681 square feet.

The chairman, Leonard Stern, has offices in the building and appears to maintain a hands-on approach with regard to tenancy, leasing activity and management functions, according to DBRS.

The Hartz Group still has plenty of equity in the office building, which has been appraised by Cushman & Wakefield at $740 million; under the terms of the new loan, the owner can borrow an additional $100 million through an approved mezzanine lender.

DBRS, which values the property more conservatively, at $340.5 million, calculates loan-to-value ratio at 74.6%, which it considers to be "very favorable."

A person familiar with the transaction said that feedback from investors was positive given the low leverage, strong historical occupancy, institutional sponsorship and exceptional building quality.

The deal was distributed to 15 unique investors, primarily money managers and insurance. The senior, triple-A rated class garnered the broadest group of buyers, with six unique accounts participating. The 10-year certificates were priced to yield 118 basis points over swaps, or 2.8028%. The most subordinate class to be sold, rated BBB-/BBB, priced to yield swaps plus 235 basis points, or 3.9728%.

The deal is expected to settle on Oct. 26.

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