DBRS Confirms Eight Classes and Downgrades 12 other Classes of Merrill Lynch Mortgage Trust 2005-CIP1

DBRS has today confirmed Classes A-2 through A-4 of Merrill Lynch Mortgage Trust Commercial Mortgage Pass-Through Certificates, Series 2005-CIP1, including notional classes XP and XC, at AAA with Stable trends. The rating on Class A-1 was discontinued in July 2010 after it repaid in full. DBRS has downgraded 12 classes, based primarily on the following reasons:

One loan, the Holiday Inn Mission Bay Sea World loan (Prospectus ID#13) was resolved in an REO sale which caused a realized loss to the trust of $19.6million. The liquidation has reduced the principal balance of the unrated Class P by 76.2%. This also reduces the credit enhancement of the rated bonds. The loss represented 64% of the loan’s original pool balance.

The performance for the pool has generally deteriorated with the weighted-average debt service coverage ratio (WADSCR) decreasing from 1.52x as of the last DBRS review (July 2009) to a recent 1.36x. The recent WADSCR includes YE2009 financial reporting for 79.4% of the pool. The lower DSCR reflects a significant deterioration in some of the pool’s larger assets, namely, The Highwoods Portfolio57 (Prospectus ID#2 which has suffered a 44% decline in NCF since issuance), the Residence Inn Hotel Portfolio 1 (Prospectus ID#6, which has suffered a 26% decline in NCF since issuance), the Residence Inn Hotel Portfolio 2 (Prospectus ID#7 which has suffered a 26% decline in NCF since issuance), and the Equity Lifestyle Portfolio (Prospectus ID#8 which has suffered a 59% decline in NCF since issuance).

Eleven loans, representing 14.1% of the current pool balance, are delinquent. The pivotal delinquent loans are the Highwoods Portfolio57 (Prospectus ID#2), University Village (Prospectus ID#12) and 2801 Network Boulevard (Prospectus ID#20). These three specially serviced loans account for 10.4% of the current pool balance. DBRS expects that the losses associated with these three loans will be significant.

Together, the delinquent and specially serviced loans have the potential to cause losses to the investment-grade bonds in the transaction, while significantly reducing the credit enhancement available to the senior bonds. A pivotal loan is the Highwoods Portfolio57; its resolution will drive further future rating actions and is the primary reason for the ‘Under Review With Negative Implications’ assignment for Classes AM through G.

The refinancing track record for the transaction has been poor. Of the 14 loans that were scheduled to refinance in 2010, only half actually left the pool. This includes the REO loan, Holiday Inn Mission Bay Sea World (Prospectus ID#13) which had a loss that represented 64% of its original loan balance. Seven loans that were scheduled to refinance remain in the pool. Two of these, the Glenbrook Square Mall (9.13% of the current pool balance) and the Burlington Town Center (1.26% of the current pool balance), were GGP loans that were resolved with extensions and are current. The remaining five loans, including the Highwoods Portfolio57, are non-performing matured balloon, and are at the special servicer.

The Highwoods Portfolio57 is collateralized by 31 suburban office properties located in Tampa, Florida and Charlotte, North Carolina. The properties are one- to five-story buildings, ranging in size from 15,000 sf to 133,359 sf, that were built between 1972 and 2000. The portfolio's DSCR has steadily declined since issuance going from 1.70x at issuance to 1.36x as of YE2008 and finally a 1.07x as of YE2009. Occupancy remains challenged at 69% as of December 2009, down from 80% at issuance. The portfolio faces further significant tenant lease expirations scheduled in the coming three years which represent 38% of the NRA. Leverage on the portfolio is reasonable at $80 per unit; however, the loan was scheduled to mature in August 2010, but was unable to refinance. The special servicer reports that the borrower is cooperative and it is likely that a relatively expedient workout resolution will be found. There has not been an updated appraisal to date, but preliminary analysis suggests that the loan could take a loss that represents greater than 50% of its original balance. Such a loss would directly affect the investment-grade bonds of the transaction and significantly reduce the credit enhancement of the senior bonds. The transaction will therefore be reviewed after the Highwoods Portfolio57 loan has been resolved and either liquidated or returned to the master servicer with a modification.

The University Village loan (Prospectus ID#12, 1.71% of the current pool balance) is collateralized by a retail property that is located in Riverside, California and situated one block east from the University of California, Riverside. DBRS considers the loan per square foot of $193 to be high for the local market. The loan was transferred to special servicing after the borrower requested a return to IO debt-service payments because of cash flow problems at the property. The special servicer has denied the borrower's request and was in negotiations with the borrower over a possible resolution but negotiations have ceased and foreclosure proceedings have been initiated. The loan was previously added to the watchlist after a lockbox on the loan was activated because total sales for the Metropolitan Theatre dropped below $2.75 million. As of July 2009, the subject was 71.8% occupied. The loan currently has over one year’s debt service in outstanding payments and advances, and the appraised value was reduced from $41 million at issuance to $20 million. The borrowing entity consists of a three member TIC who purchased the property in 2005 and contributed $7.3 million of cash equity into the deal. Since a resolution with the borrower does not appear likely, losses to the trust associated with this loan are now expected to be significant.

The 2801 Network Blvd. (Prospectus ID#20) loan is collateralized by a Class A office property located in Frisco, Texas, that was built in 2001. The current loan per square foot of $110 is reasonable. This loan was transferred to special servicing in January 2010 due to imminent default. Prior to the transfer, the loan was added to the DBRS HotList for a DSCR below 1.0x and low occupancy. The property had a large tenant (45.0% of the NRA) that did not renew its lease at the end of May 2008. The subject is currently 56% occupied as of November 2009. Future performance at the property will depend on the special servicer and borrower’s ability to lease the vacant space. DBRS will continue to monitor the loan.

DBRS anticipates further rating actions will take place as a clearer picture on the resolution strategies and expected losses of the specially serviced loans is attained. The next major loan maturities do not take place until 2012.

DBRS further notes that Class M, N and P have interest in arrears.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are CMBS Rating Methodology and CMBS Surveillance, which can be found on our website under Methodologies.