The $254-million loan is backed by 667 Madison Ave. on Manhattan's Upper East Side. (Photo: Halpern Architects)

WASHINGTON, DC–The first single-borrower deal structured to comply with the risk retention rules that are going into effect at the end of the year is making its way into the market.

This transaction follows this summer's WFCM 2016-BNK1 conduit, the first to comply with the rule. What is noteworthy about this new conduit, though, besides the fact that it is a single-borrower, is that this deal, COMM 2016-667M, is the first to transfer the retained classes to a third party under the risk regulation rules, according to Trepp.

667 Madison Ave

The deal itself is straightforward enough: Deutsche Bank provided a $254-million loan backing an office tower located at 667 Madison Ave in Manhattan one block east of Central Park that is nicknamed the Country Club building. Hartz Financial is the loan's sponsor. The building has in-place vacancy of 9.2% and a gross office rent of $144.65 per square foot, according to a DBRS pre-sale report, significantly outperforming the surrounding submarket.

According to DBRS [PDF] :

The collateral is able to command such high rents since it is one of the top office properties in the city and continually achieves premium rental rates. Given the above-market rental rates, location and Central Park views, the subject competes with a small number of extremely desirable trophy properties in the submarket.

The compliance with the risk retention rule is a credit neutral event in this instance. Rating-wise it doesn't have a direct impact on the analysis, DBRS Vice President Matthew Reid tells GlobeSt.com. In general, though, it was a good way to test the market ahead of the rule going into effect and work out any unknowns, he said. It was a plus that the asset is trophy quality, he added. “That makes it easier for people to get their heads wrapped around the structure.”

An Eligible Horizontal Residual Interest

As for the structure itself it wasn't that great of a surprise in that it followed one of the three models that the market expected these securities to follow, DBRS Managing Director Mary Jane Potthoff said.

COMM 2016-667M was structured to have an eligible horizontal residual interest, in which the sponsor retains 5% of the most subordinate class of the fair value of all of the CMBS issued. (The other two likely models would be an eligible vertical interest, in which the sponsor retains 5% of the face value of each class of securities issued in the CMBS transaction or an L-shaped combination in which the retained interest consists of at least 5% of the value of the transaction held through a combination of the two aforementioned structures.)

The Retaining Third Party Purchaser

In the pre-sale report DBRS wrote that:

PCSD PR CAP IV NR Reten Private Limited is expected to be the Retaining Third Party Purchaser upon the closing date of the transaction and will not be permitted to transfer the eligible horizontal residual interest (other than to a majority-owned affiliate) unless it is permitted under the risk retention requirements. The Retaining Third Party Purchaser was recently formed to invest in CMBS transactions and is advised by Prima Capital Advisors LLC (Prima Capital). Prima Capital is an investment advisory firm with funds under management totaling $3.7 billion as of June 30, 2016.

The so-called PCSD fund is one of the handful of funds that had been expected to develop to take on this risk. Its existence — and participating role in COMM 2016-667M — is no doubt welcome to originators, borrowers and investors which had feared the CMBS market might seize up because of the new rules.

The B Piece Still Needs Convincing

Even though two conduits have come to market compliant with the risk retention rules, the industry is in no position to relax rules just yet. The first one that came to market in August appears to be having trouble getting B piece investors on board, according to Catherine Liu in Trepp Talk.

She writes:

Put together by several major bank issuers, the deal is experiencing some pushback as the bank issuers want to impose strict provisions on B-piece investors that would set certain standards for creditworthiness. At the same time, B-piece buyers are expected to cover penalty costs that may arise if the deal fails to fully comply with regulations. These demands, coupled with other legal requirements, have made it difficult for investors to finalize their negotiation terms for the deal.

Instant Insights /

New CMBS Moves Retained Classes to 3rd Party Under Risk Retention Rule

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