12.17.14: More First Mortgage/Mezzanine Combos Expected in 2015-2017

The significant amount of CMBS conduit loan maturities in 2015-2017 will provide an unprecedented opportunity for CMBS conduit loan mortgage brokers to increase their origination volume in the upcoming years (see our 12.12.14 post), but not without some challenges.

“I went back to Jim Brett, our CMBS bond analyst and head of CMBS conduit loan underwriting at ValueXpress, to dive once again into Trepp to determine CMBS conduit loans maturing in 2015-2017 that report DSCR below 1.20x,” said Michael D. Sneden, Executive Vice President at ValueXpress. “These loans will be challenged to refinance for the full balance due at maturity because the property does not provide enough cash flow to support the minimum DSCR of 1.25x required in CMBS to pay off the full loan principal at maturity.”

Jim reports that roughly 30%, 40% and 45% of the maturing loans in 2015, 2016 and 2017, respectively, report DSCR < 1.20x. But there is some hope for loans with DSCR of 1.10-1.20x, a CMBS first mortgage/mezzanine combo.

The way this product works by example is a traditional 10-year first mortgage of, say, 70% on a maturing, well-located, multi-tenant office building is underwritten at regular CMBS conduit loan rates of, say 4.5% today. Then a mezzanine loan is modeled on top of the first mortgage, up to 85% LTV and a 1.10x minimum DSCR, with a coupon of 11%.

Now 11% on the surface sounds awful. But to sell it, the borrower is presented with a seamless, blended Term Sheet with the combined 85% principal amount that looks like one loan at one rate. The rate is computed by blending: 70% divided by 85% times 4.50% plus 15% divided by 85% times 11% equals 5.35% roughly. Any real estate veteran should realize that 5.35% for 85% leverage is really quite attractive.

“We will be further sorting Trepp to isolate those properties with loans maturing in 2015-2017 with DCSR between 1.0x and 1.20x to present them this CMBS first mortgage/mezzanine combo as a way to refinance overleveraged properties,” commented Sneden.

This entry was posted in CMBS, CMBS Conduit Loans, CMBS Securities, Commercial Mortgage-Backed Securities, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , , , . Bookmark the permalink.

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