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CMA
June 16, 2017  

Blackstone, Goldman in Novel CMBS Team-Up

After winning the mandate to originate a $753 million debt package on a Virginia office portfolio, Blackstone Mortgage decided to team up with Goldman Sachs to securitize the senior portion, employing an unusual risk-retention strategy in the process.

It’s unclear whether Blackstone originally intended to keep the entire floating-rate package or planned all along to off-load the senior portion. Either way, after evaluating its options, the mortgage REIT decided to juice its potential return by securitizing the senior $500 million component, while retaining both the high-yielding junior bonds and the $253 million of mezzanine debt.

If the securitization prices well, other nonbanks that win large financing assignments could adopt the same strategy, according to commercial MBS pros. The deal, led by Goldman, is expected to price next week (RPT 2017-ROSS).

The debt package refinanced seven office properties in the Rosslyn submarket of Arlington. The 2 million-square-foot portfolio is owned by a partnership between a Goldman fund and Monday Properties of New York.

The $500 million senior mortgage is pegged to one-month Libor plus 220 bp. The debt package also includes a $71 million senior mezzanine loan and a $71 million junior mezzanine loan, both of which have initial coupons of Libor plus 762 bp. There is a future-funding component of up to $110.6 million, which will be equal in seniority to the junior mezzanine line. The interest-only debt package has a two-year term, with three one-year extension options.

Blackstone won the mandate for the financing in April. It subsequently decided to bring in Goldman to securitize the senior component. Goldman funded that $500 million senior mortgage on May 11 and promptly turned around and sold $100 million, or 20%, of the balance to Blackstone. By contributing that portion to the securitization, Blackstone qualified to serve as the risk-retention sponsor. The REIT will retain the transaction’s $25.4 million junior class, equal to 5% of the total amount. It’s unknown whether Blackstone will take down any other junior classes. Also, Blackstone originated and retained the mezzanine debt and will supply the future funding.

Under the prevailing interpretation of rules that took effect at the end of last year, the “retaining sponsor” must contribute a portion of the collateral pool. That sponsor must ensure that the party that retains the mandated 5% exposure to a transaction fulfills all of its responsibilities. That isn’t an issue when a lender retains the exposure itself. But it has become a sticking point when the risk-retention role is passed off to a B-piece buyer, because issuers are wary of having to police such buyers for the life of transactions and possibly becoming liable for any violations.

Issuers have been demanding that B-piece buyers indemnify them against possible losses, but those negotiations have sometimes been thorny. In the Goldman securitization, however, no indemnifications are needed because Blackstone is both the retaining sponsor and the risk-retention party. So Goldman avoids having to serve as the policeman, and Blackstone avoids having to provide guarantees that might impede other aspects of its business. For example, some issuers are insisting that B-piece buyers be unaffiliated with any other party to a securitization. That could prevent other business dealings down the road.

The Rosslyn office portfolio had an average occupancy rate of 94.5% from 2005 to 2010, but leasing demand subsequently softened in the wake of a federal-budget freeze and a realignment of military bases. The average occupancy rate has fallen to 67.5%.

The Goldman-Monday partnership will tap Blackstone’s future-funding commitment to finance $118.3 million of projected leasing expenses and capital improvements.

The Goldman fund, called U.S. Real Estate Opportunities 1, has an 89% ownership interest in the partnership. That $1.3 billion vehicle was formed by Goldman and sovereign wealth funds of Kuwait and Qatar. Monday holds the remaining 11% stake.

The portfolio, appraised at $1 billion, contains three Class-A properties and four Class-B properties. The Class-A properties are at 1000 Wilson Boulevard (558,000 sf), 1100 Wilson Boulevard (525,000 sf) and 1101 Wilson Boulevard (332,000 sf). The Class-B properties are at 1400 Key Boulevard (175,000 sf), 1401 Wilson Boulevard (198,000 sf), 1501 Wilson Boulevard (128,000 sf) and 1515 Wilson Boulevard (125,000 sf).

The Goldman-Monday partnership used almost all of the $642 million of initial funding to retire existing securitized, mezzanine and balance-sheet debt.

The financing package was originally expected to be closer to $900 million and include two additional properties in Rosslyn. The Goldman-Monday partnership owns 10 Rosslyn properties in all, accounting for more than a third of the submarket’s total office space.