DBRS Confirms Seven Classes and Downgrades eight other Classes COMM 2004-LNB2

DBRS has today confirmed Classes A-3 through F of COMM 2004-LNB2, including notional classes X-1 and X-2.

DBRS has downgraded classes G through O of the transaction primarily because of the projected impact of the resolution of three specially serviced loans: 1 Northbrook Corporate Center (Prospectus ID#15, 2.0% of the current pool balance), Northbrook (Prospectus ID#22, 1.5% of the current pool balance), and Hawthorne Apartments (Prospectus ID#17, 1.8% of the current pool balance). The pool has a total of four specially serviced loans that account for 5.5% of the current pool balance. The downgrades also reflect the interest shortfalls that have hit Class J of the transaction.

After the rating action, the trends on all classes of the transaction are Stable. Outside of the specially serviced loans, collateral performance is strong. Defeased collateral accounts for 18.8% of the current pool balance, and the three largest non-defeased loans; Tysons Corner Center (Prospectus ID#1, 19.6% of the current pool balance), AFR/Bank of America Portfolio (Prospectus ID#2, 9.4% of the current pool balance), and Meadows Mall (Prospectus ID#4, 7.1% of the current pool balance), have each exhibited exceptionally stable performance since issuance. These three loans account for 36% of the current pool balance.

The two Northbrook properties (Prospectus ID#15 and ID#22) together represent 3.44% of the current pool balance. These two office properties originally had the same borrower and are located adjacent to each other in a tertiary market outside of Philadelphia. The properties’ submarket remains soft with approximately 25% vacancy reported by CoStar.

The vacancy at 1 Northbrook Corporate Center is inline with its submarket at 25%; however, it has not had enough cash flow to cover its debt service obligation for some time and has accumulated over $1.19 million in servicing advances, which represents just over one year’s debt service payment. There has been an appraisal reduction applied to the loan of approximately $7.7 million (the issuance appraised value was $19.2 million). This reduction created an ASER that is a significant contributor to the interest shortfalls that have hit Class J. The loan is special serviced and is expected to be real estate owned (REO) in the near future. The current loan balance is $15.2 million, and DBRS expects that the disposal of the asset will cause significant losses to the trust.

The occupancy at Northbrook (Prospectus ID#22) is performing below its submarket at 66.7% as reported by CoStar. A February 2010 rent roll indicates that occupancy had at one point declined to 52%. Total servicing advances stand at $918,580, which is well over one year’s contractual debt service payment. An appraisal reduction of $5.4 million was applied to the loan (the issuance appraisal value was $14.1 million). The appraisal reduction created an ASER that is a significant contributor to the interest shortfalls in the transaction. The loan is at the special servicer and is expected to be REO in the near future. The current loan balance is $11.2 million and disposal of the asset is expected to cause significant losses to the trust.

Hawthorne Apartments (Prospectus ID#17, 1.8% of the current pool balance) has also suffered from a weak submarket and volatile occupancy. This specially serviced loan was scheduled to mature in December 2008, but was unable to refinance. More recently, occupancy has rebounded and was reported to be 94% as of August 2010. The property is located in a suburban market outside of Houston, and a servicer site inspection indicated that the property is well maintained. An appraisal reduction of $698,707 was applied to the loan (the issuance appraised value was $17.0 million). DBRS expects that the losses on this loan will be less severe than the Northbrook properties. The appraisal reduction created an ASER that contributes to the interest shortfalls in the transaction.

The outlook for the pool is also influenced by the pool’s schedule of upcoming loan maturities. Seven loans are scheduled to mature prior to the end of 2011 (these loans represent a combined 13% of the current pool balance). The average debt yield of the loans that are scheduled to mature in the near future (excluding Hawthorne Apartments) is 13%. The maturing loans include two which are among the pool’s ten largest loans (Fairstone at Riverview and Wenatchee Valley Mall). Fairstone at Riverview (Prospectus ID#5, 4.7% of the current pool balance) and Wenatchee Valley Mall (Prospectus ID#7, 3.4% of the current pool balance), report YE2009 debt yields of 9%. While performance of the maturing loans is essentially stable, the upcoming maturities represent a major test for the pool, given current market conditions.

DBRS further notes that Class J, K, L, M, N, O 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.