S&P Barred from Rating Conduits: One Year

For years now, there has been talk of S&P lowering their rating standards. If you've forgotten, after the housing bust, there was a decent amount finger pointing in the direction of the rating agencies, with particular focus on S&P.

Because the rating agencies are hired and paid by bond issuers, the agencies have an incentive to give better ratings than their competitors. Because of S&Ps misconduct, they are barred from rating CMBS conduit deals.

Its single-borrower business and existing ratings won’t be affected. The regulator late last year was negotiating terms of a settlement over alleged violations of federal securities laws when it rated six CMBS deals that were issued in 2011. The worry at the time was that the SEC would suspend S&P from rating all CMBS business. But that’s considered unlikely. As it is, S&P hasn’t rated a new-issue CMBS conduit transaction since last June.

Cantor Lends $270 Million Against NYC’s 26 Broadway

Cantor Commercial Real Estate Lending has provided $270 million of senior and mezzanine financing against 26 Broadway, a 900,000-square-foot office property in Manhattan’s Financial District.

 

The seven-year financing includes a senior loan, with a balance of $220 million, that is expected to be securitized.

 

The 32-story property, also known as the Standard Oil Building, is owned by the Chetrit Group, which in 2007 acquired it, along with three of the four land parcels on which it sits, from the Koeppel family for $225 million. Five years ago, it paid $35 million for the last land parcel.

 

The property previously was encumbered by a $183.5 million loan that Wells Fargo Bank acquired last year from a collateralized debt obligation that was managed by what’s now Gramercy Property Trust.

 

The 26 Broadway building is 90 percent occupied, which is up from 76 percent last year, thanks to some 126,000 sf of new leases that were signed in recent months. Those include a 45,000 sf agreement with the New York Film Academy, which will occupy its space through 2029, and 20,000 sf agreements with graphic-design company Ustwo Studio Inc. and law firm Schlam Stone & Dolan.

Its largest tenant is the New York City Department of Education, in 181,659 sf through January 2039 on behalf of the Lower Manhattan Community Middle School.

 

New York City has designated the 26 Broadway building as a landmark. It was constructed in 1928 by Standard Oil Co., which used it as its headquarters until 1956, when it moved to 150 East 42nd St.

The building includes 3,500 sf of retail space.

KKR puts weight behind non-bank CMBS lending

Non-bank lenders are expected to be a bigger force in the US CMBS lending market in the coming year, particularly as deep-pocketed firms like KKR & Co LP elbow their way into the sector.

The buyout firm has hired industry veteran Matt Salem and several members of his team from Rialto Capital Management, a person familiar with the matter said on Thursday.

It marks KKR’s first foray into real estate debt since it created its property-focused group in 2011.

Rialto has been a consistent presence in CMBS deals as a lender as well as a B-piece buyer over the past three years, and it was one of only a handful of specialty debt shops to ramp up in both areas in the wake of the financial crisis.

At KKR, the team will focus on investments in preferred equity, mezzanine debt and junior credit like B-pieces, in addition to CMBS lending, the person said.

The news was the talk of the second day of the annual Commercial Real Estate Finance Council conference in Miami.

“Non-bank lenders are each saying they are going to increase loan production by 50% this year,” a portfolio manager who buys CMBS told IFR on the sidelines of the conference.

“We want to know how long they will be around after the loan is made.”

Though KKR’s move is not expected to dethrone the dominant players in the CMBS market, it does represent an important shift.

Bond deals flowing from bank-sponsored shelves are likely to look more complicated as the list of lenders spinning loans into bonds expands, the portfolio manager said.

Another non-bank ramping up its CMBS lending effort is Benefit Street Partners (BSB), the credit strategy arm of Providence Equity Partners, a global private equity firm with US$40bn in capital under management.

Scott Wayneburn, a former Deutsche Bank staffer, heads BSB’s 11 member commercial real estate team.

Terrorism Risk Insurance Act Extension Signed into Law

Just last night, President Obama signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2015 (H.R. 26). The bill is a six-year extension of the terrorism risk insurance program and also includes The Council’s long-sought NARAB provision to create an interstate agent/broker licensure clearinghouse.

The "trigger” for an act of terrorism covered under the law will move from $100 million in 2015, to $200 million in 2020 (increasing $20 million each year). Additionally, the bill also increases insurer co-shares from 15% to 20% over the next five years. 

Meanwhile, on Monday, The Council asked the Treasury Department for regulatory guidance clarifying the TRIA coverage gap, which is creating some marketplace issues. The issues stem from two facts: 

1. Because the old act expired, the new law technically is a brand new law and not an extension of the old law; and 
2. Many carriers had conditional exclusion riders on the terrorism component of their coverage that said that if the law expires the coverage is terminated.

Read an in-depth summation from law firm Steptoe & Johnson.

Asian Investment Seizes a Tenth of Russia's Commercial Real Estate Market

Investors from Asia and the Near East sprang from nowhere to make up 10 percent of investments in Russian commercial real estate in 2014, according to a study by real estate consultancy Cushman & Wakefield.

The numbers show "a trend of capital from Western Europe and the U.S. gradually leaving as players from the East enter," the report said, adding that Asian investors didn't close any investment deals in the Russian commercial real estate market in 2013.

As Asian investors made their entrance, European capital froze up, spooked by slowing economic growth and Western sanctions over Russia's support for separatists in eastern Ukraine.

European capital accounted for just 9 percent of total investment last year, down from 29 percent in 2013. Meanwhile Russian investors' share rose from 71 percent in 2013 to 81 percent in 2014.

Widespread concern over the state of Russia's economy dealt a harsh blow to the total volume of investment in commercial real estate, which fell to $4.2 billion in 2014, according to Cushman & Wakefield.

The market had seen $8.1 billion in investment in 2013 and $8.8 billion in 2012, according to consultancy Jones Lang LaSalle.

Cushman & Wakefield forecasts that investment will fall further to $2.5 billion in 2015, with some projects under significantly more pressure than others.

"Deals denominated in foreign currency have suffered to a greater extent from the current situation," said Irina Ushakova, head of capital markets at Cushman & Wakefield. The Russian ruble fell about 40 percent against the U.S. dollar last year and is still viewed as volatile, adding significant uncertainty to any projects using foreign currencies.

Projects with ruble-denominated investment and cash flows have a higher chance of reaching closure, Ushakova said