The inclusion of a loan secured by Chicago's Prudential Plaza in a recent CMBS is causing a stir.
Some investors are on edge about the property’s recent financing history, which suggest sharply different appraisal values within weeks of each other.
So say analysts at Bank of America Merrill Lynch, who published a report last week questioning the underwriting of a $115 million loan secured by Prudential Plaza in Chicago.
The loan is one of 59 bundled into COMM 2015-CCRE26, a $1.1 billion deal sponsored by Deutsche Bank and Cantor Fitzgerald that priced on Sept. 25.
While it's the single largest loan in the collateral pool, it represents just a slice of a larger, $415 million loan backed by the iconic property.
The issue is the value of this property. The current loan, taken out in August, is based on an appraised value of $642 million.
But the owners did not repay the old loan, which had been modified in 2013, in its entirety. Instead, on July 30 they merely paid off a $336 million portion of that loan, known as the A-note, according to B of A analysts and a market source.
The remaining $74 million portion, known as the B-note, was written off.
The A/B loan was held in securitization trusts JPMCC 2006-LDP7 and JPMCC 2006-CB16, according to the market source. A collateral breakdown of JPMCC 2006-LDP7 from Trepp confirmed that trust held half the A and B notes, with the prepayment and write off taking place July 30.
Analysts at B of A are deducing that the valuation to justify writing off the B note must have been much lower than the one used to obtain the new loan.
It's common to split troubled commercial mortgages into two portions; with the A note sized near a property's current market value, leaving the remaining B note fully underwater. In fact, B notes are referred to as "hope" notes because the special servicer "hopes" the borrower can grow the value of the collateral sufficiently above that level to make the hope note worth something later.
The fact that the owner of Prudential Plaza was able to obtain a $415 million mortgage suggests that B note may not have been fully underwater.
But Kroll Bond Rating, which rated COMM 2015-CCRE26, values Prudential Plaza at just $364 million. This would suggest that the B notes were at least partly underwater.
So perhaps it's the parties that made the most recent loan who were misled about the value of Prudential Plaza. On the other hand, these lenders turned around and sold the loan, or part of it, to a securitization trust. So perhaps they were not too concerned about the valuation.
B of A published its report after talking to investors.
The $300 million of the loan that isn’t packaged into COMM 2015-CCRE26 is held by Deutsche Bank subsidiary German American Capital Corp. KBRA said the other slices of the loan are expected to be contributed to future securitizations.
Deutsche didn't return an email requesting comment as of press time.
Barclays also had issues with this particular loan, saying in a report on Oct. 2 that the losses incurred by the previous loan’s modification "highlight the credit risk of the property."
Investors have apparently taken notice.
The deal priced sharply wide to a comparable sold around the same time. Pricing on Sept. 15, WFCM 2015-NXS3 — a Wells Fargo CMBS — priced appreciably tighter than COMM 2015-CCRE 26 all the way through the capital stack. Triple-A tranches saw a 10-basis-point difference while BBB- tranches were 65 basis points apart, according to Barclays analysts. They said this differential was particularly remarkable given that CCCRE26 had mezzanine tranches rated by Fitch, while NXS3 did not.
But while the spread gave Barclays analysts some comfort that investors were being discerning, B of A analysts didn’t sound as encouraged. In their view, if deals with "questionable borrower behavior" keep getting printed, the broader CMBS market could suffer.
Prudential Plaza consists of two adjacent, Class A office towers in Chicago's downtown. Combined the buildings contain a total of 2.3 million square feet and were 71% occupied as of June 2015. McGraw Hill is the largest tenant, producing 12.6% of the base rent. No other occupant accounts for than 4.5%.