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Here’s a headline for you:  We don’t know if a conventional CMBS securitization where risk retention bonds are retained by a B-buyer under an industry standard third party purchaser agreement achieves accounting sale treatment.  Failure of accounting sale treatment means the selling bank cannot book the gain and does not derecognize the underlying loans resulting in the entire portfolio of loans remaining on its balance sheet for both Generally Accepted Accounting Principles, or GAAP, and presumably, for risk based capital purposes.

As might have been said by that great philosopher of the 20th Century: “You cannot possibly be serious!”

Commercial Mortgage Alert broke the story on Friday, August 11th and so I’m finally going to talk about the issue.  I’ve been itching to do so since early June when I became aware of the problem but it really didn’t seem there was a lot of upside for a broad industry discussion of the problem back then while the auditors and the internal finance teams at our banks and other CMBS sponsors were still pondering the issue.  But, after a good deal of mulling and to-ing and fro-ing, it’s still not resolved so I think it’s time to bring fun with GAAP out of the closet.Continue Reading Fun With GAAP:  CMBS at Risk

A standalone securitization of a portfolio of properties closed in June. To our knowledge, this was the first transaction in recent memory done in a direct issuance format.  In this case, direct issuance means that the sponsor organized the lender and the depositor as well as a borrower and crafted the loan between the lender and borrower, which was simultaneously closed and funded by the bond proceeds from the securitization at closing.  An additional unique feature in this transaction was that the sponsor met its obligations under the risk retention rules with a horizontal cash deposit equal to 5% of the fair value of the certificates.  More on this later.

In this annoying new world of risk retention, the direct issuance model embodied in this transaction can be a paradigm for transactions in the SASB space.
Continue Reading Direct Issuance is Here – A New Paradigm for Single Asset Single Borrower (SASB) Securitization

What in the world have we done to ourselves? Our CRE Securitization business, or at least the conduit part of our business, continues to shrink:  $800 billion in outstanding principal balance in 2007 and now, $400 billion?  Maybe, right now, we’re at a run rate of $50 billion per year.  Is that enough?  Does that deliver critical mass?  Are we a going concern?

Maybe.

As the business shrinks, the CMBS share of the Lehman Index (Bloomberg Index) continues to dwindle.   That imperils liquidity and the diminishment of liquidity itself becomes yet another reason to abandon the sector.  As that happens, some investors drop out, some “right size” their CMBS teams and as fewer analysts follow the space, the business again dwindles.  Net/net, investors lose interest as there are fewer and fewer reasons to buy CMBS bonds.  As the business gets smaller, less attention is paid by the mortgage banking community, fewer opportunities find their way to the CMBS window and other service providers are stressed. Wash, rinse and repeat until someone shuts off the lights and locks the door on the way out.

Okay, I’m overstating it a bit, but you get the idea.  We’ve got a problem.Continue Reading It’s Time to Bring Back the Square State Conduit:  If We Build It, They Will Come.

Washington, DC SkylineCREFC held its Annual Conference last week in Washington D.C. Given the current politically charged climate, 2017 felt like a very appropriate time to move the Annual Conference from its traditional home in New York to Washington. Although attendance was down slightly from last year, over 1000 people attended the conference. Dechert hosted a reception on Monday at The Source restaurant for 250 friends and colleagues, where the excellent food and free flowing drinks lasted well beyond the official closing time.

The conference featured a number of new panels this year, including panels on the state of retail and the New York City real estate market. As usual, Dechert was well-represented in the panels and meetings. Dechert’s Dave Forti participated in a panel on “The Art of the Deal: Large Loan Challenges in 2017”, which discussed the current state of the large loan market and the challenges facing single-asset single-borrower (SASB) securitizations. One highlight of conference was the industry leaders’ round-table, which included Dechert’s Rick Jones and Laura Swihart, who closed out the roundtable in typical satirical, Washington fashion (Covfefe anyone?)
Continue Reading 2017 CREFC Annual Conference: Into the Heart of the Swamp

John Cleese, one of the great classic philosophers of the mid-twentieth century, made that inauspicious (from the perspective of the Shop Keeper) observation, “This parrot is dead!”  To which Michael Palin responded that it was merely resting.  (It’s better in drag and with the East Ender accent, but you get the idea.)

The Parrot skit [I wish I could link you to YouTube here, it is really very funny, but the damn lawyers here won’t let me.] came to mind recently as I attempted to negotiate yet another Third Party Purchaser (TPP) Agreement in risk retention land.  As everyone knows and is heartily sick of hearing, all securitization transactions now require the sponsor, or in commercial real estate deals, a third party purchaser, to hold risk retention securities in accordance with the breathtakingly vacuous Risk Retention Rule.  At Dechert, we did one of the pre-effective date pretend risk retention deals and, our TPP agreement was a weighty six pages long.  Since the Rule became real, TPP agreements have metastasized into much longer, more complex documents raising numerous dauntingly trying questions.

I have begun to wonder whether the risk retention TPP agreement is already near its death bed just some brief months following its birth.Continue Reading Monty Python Dead Parrot? Risk Retention and the Third Party Purchaser

Well, we’ve had the big reveal and the administration’s new tax plan is out.  This plan, announced with a great deal of fanfare, feels more like a campaign promise than an actual executable plan.  At two hundred forty-six words from end to end (four different typesets, three different fonts, three colors, weird spacing and a sad little dash at the top), anyone who was hoping for clarity and a plan to go to the bank on, is either disappointed… or perhaps relieved.
Continue Reading Have Yourself a Very Trumpy Tax Plan

The Auditing Standards Board (the “ASB”) of the American Institute of Certified Public Accountants recently released new standards as part of the “Attestation Clarity Project” with the goal of redrafting all its standards “in clarity format” (what format were they in before?  And, while we’re at it, can we try to use English here?  Clarity format?).  This Project will require compliance by bankers and issuers with very specific disclosure obligations (reps?) before the auditors will issue an Agreed Upon Procedures Letter (AUPs) for securitizations.  Some of this formalized existing practice, but the changes go further and are far more prescriptive.  A “new letter of representation” from the party who hires the auditors (the “Engaging Party”) is required as well as similar letters from the parties providing the data that the auditors are reviewing (each, a “Responsible Party”).  These new rules will become effective on May 1, 2017.  Any AUP that is issued after May 1 will be subject to the new rules.
Continue Reading New Accounting Rules Regarding AUPs Taking Effect May 1, 2017:  More Fun for a Battered Industry

The 2017 CREFC January Conference, which took place last week at the Loews Miami Beach Hotel, provided an opportunity for those in the commercial real estate finance industry to reflect on an eventful 2016, and look ahead to 2017.  Although attendance was down by almost 11% this year (we’ll blame Zika), around 1,600 people attended this year’s conference.  The mood of the conference was generally upbeat, with most attendees expressing cautious optimism for 2017.  As usual, the parties were lively, and 435 people attended Dechert’s reception at the SLS Hotel on Monday night to indulge in sushi surfboards and the national championship game.

While the panels, meetings and forums provided an opportunity to take the pulse of the industry, and we will get to 2017 and beyond shortly, we need to pause for a moment and look back at a year which may be an inflection point in our industry, our country, and possibly the world.

Continue Reading 2017 CREFC January Conference – Primed for a Comeback

Your correspondent is fresh from the front-lines of the risk retention wars where great armies of lawyers, bankers and advisers are fixedly staring at each other, staring out of the redoubts of their respective defensive crouches in a complex, multidimensional chess game.  All are fervently hoping against hope that something or someone does something to create clarity and allow our business to pivot around this new set of rules so it can continue to thrive.  I think all of us in the finance world are justifiably proud of the fact that if we are given a set of rules, we’ll figure out how to conduct business.  But the uncertainty here is freezing everyone in place, a giant front court pick that we can’t seem to get around.  But one thing is certain and that is that Christmas Eve is coming and with it this Rule will become effective.  After having obsessed about the Risk Retention Rule for years now, we are broadly no closer to clarity about how one should play in the soon to be upon us risk retention world.
Continue Reading A Report From the Risk Retention Front-Lines

Closeup of a seismograph machine earthquake

Returning to our theme that nothing’s easy and everything keeps changing, here is one out of left field. Let’s talk Probable Maximum Loss (“PML”) and seismic risk. ASTM International, the market standard setting organization for everything from toilet bowls to condoms, has just issued an amended seismic standards: Standard Guide for Assessments of Buildings (E2026-16) and their Standard Practice for Probable Maximum Loss Evaluations for Earthquakes (E2557-16) (the “Standards”)[1]. These Standards establish an industry norm for the requirements to evaluate the financial risk for real estate in zones with seismic activity. Each investigation of real estate is “graded” between a Level 0 investigation (high uncertainty) and a Level 3 investigation (very low uncertainty) based on the qualifications of the assessors and the work done during the investigation. The Standards refer to a Level 0 investigation as a “desktop” investigation, maybe (in a completely subtle way) to imply something about the proximity of the assessors to the potentially shaking site.Continue Reading “Shaking” Things Up: Seismic Risk Assessments