DBRS Downgrades Three Classes of Bear Stearns Commercial Mortgage Securities Trust, Series 2007-TOP26

DBRS has today downgraded the following classes of the Bear Stearns Commercial Mortgage Securities Trust, Series 2007-TOP26 transaction as follows:

Class A-J from BBB (high) to BBB (low)
Class B from BB to B
Class C from B to CCC

Class C has Interest in Arrears in the amount of $69,596, as of the July 2011 Remittance Report.

Classes A-J and B have Stable trends.

DBRS has confirmed the other classes as follows:

Class A-1 at AAA
Class A-2 at AAA
Class A-3 at AAA
Class A-AB at AAA
Class A-4 at AAA
Class A-1A at AAA
Class AM at AAA

The above classes were confirmed with a Stable trend.

Class D at CCC
Class E at CCC
Class F at CCC
Class G at C
Class H at C
Class J at C
Class K at C
Class L at C
Class M at D
Class N at D
Class O at D

Classes D through O, cumulatively, have Interest in Arrears of $1,453,882, as of the July 2011 Remittance Report.

In addition, the notional classes X-1 and X-2 were confirmed at AAA with a Stable trend.

The downgrades are the result of the decline in the performance for the loans on the servicer’s watchlist and the loans in special servicing since the last DBRS review in December 2010.

There are 49 loans on the watchlist, comprising 15.48% of the transaction balance. Of those loans, three are in the top 15 loans in the pool, comprising 4.89% of the transaction balance.

Updated financial reporting was available for the bulk of the loans on the servicer’s watchlist, with 45 of the 49 loans reporting YE2010 financials. Those loans represent 11.13% of the pool. Two of 49 loans, representing 2.72% of the pool, were reporting Q3 2010 figures that were annualized for analysis purposes; three of the 49 loans, representing 1.64% of the pool, were reporting YE2009 figures. For these loans, DBRS determined a weighted-average NCF decline of 33.07%, from the last reported year-end figures. In addition, the weighted-average NCF decline for these loans from issuance is 33.94%. The weighted-average DSCR is 0.95x, down from a weighted-average DSCR of 1.14x for those loans from the last reported year-end figures.

The largest loan on the servicer’s watchlist is Prospectus ID#7, 909 A Street (2.37% of the current pool balance). This loan is on the watchlist and the DBRS HotList because the property's sole tenant, Russell Investments, moved its headquarters to Seattle and vacated the property in October 2010. The property is a 210,000 sf office building constructed in 1988, located in downtown Tacoma, Washington. The property has excellent curb appeal and is centrally-located. The lease on the building expires in November 2013; as the tenant will not be renewing the lease, the loan documents allow for the servicer to deleverage the asset with the use of a cash sweep that will be triggered in December 2011. The current loan per unit on the asset is quite high at $228 psf with no amortization occurring during the ten year loan term. Reis reports the overall submarket vacancy rate for the Tacoma CBD is at 14.2% for Q2 2011, with an increase to 15.0% projected by YE2011. For properties constructed between 1980 and 1989, comprising 17.0% of the market inventory, the vacancy rate is much higher, at 38.4% for the same period. Properties constructed between 2000 and 2009,comprising 6.0% of the market inventory, have a vacancy rate of 40.7% . The average asking rental rate for the submarket was $20.17 psf, with asking rents averaging $26.07 psf for newer construction. At YE2010, the DSCR was 1.62x, with a base rental rate of $23.03 psf for the single tenant. The servicer reported in July 2011 that the tenant was marketing the property for sublease, but that nothing had been secured at that time. DBRS will continue to monitor this loan closely for developments.

Prospectus ID#9, Overlook II (1.56% of the current pool balance), is on the servicer's watchlist for a low DSCR. The collateral is a 255,000 sf Class A office property constructed in 1985 and located in northwest Atlanta in the Cumberland/I-75 submarket, near Smyrna. According to the servicer, the property's DSCR declined to 0.99x, as of YE2010, due to a drop in occupancy to 80% from 90% at YE2008. The largest tenant at origination, Manugistics (12% of the NRA), vacated the building upon lease expiration in December 2008 and occupancy has yet to recover. According to Reis, the Q2 2011 vacancy rate for the submarket was 20.2% overall and 25.0% for properties of similar vintage to the subject. Reis predicts vacancy rates will decline in increments over the next five years for the submarket, with the 2015 vacancy projected to end at 17.8%. The average effective rental rate for the submarket has been on the steady decline since YE2008, when it fell by 4.7% over YE2007. At YE2009, the average effective rental rate declined by another 4.4%. At YE2010 it dropped once again, by 3.0% from the YE2009 rates. The current leverage is $124 psf and the loan does not amortize during the ten year term, maturing in March 2017. DBRS will continue to closely monitor the loan's performance given the Atlanta office market trend data and the performance of the subject asset over the past two years.
Prospectus ID#14, Stony Point East (0.96% of the current pool balance), is secured by a suburban office complex comprised of three buildings for a total of 200,000 sf in Santa Rosa, California, located approximately 70 miles west of Sacramento. The buildings are of Class A quality and were constructed between 1990 and 2000. This loan was placed on the servicer's watchlist in 2009, when the YE2009 DSCR fell to 0.73x from 2.07x after a decrease in occupancy to 55% from the underwritten level of 93%. The servicer reports that the property was able to maintain occupancy in 2010 through the use of concessions for existing tenants in the form of rent abatement periods and lower rental rates on a case-by-case basis. As such, while the property occupancy increased to 83% at YE2010, the DSCR fell again, to 0.34x for the period. The servicer also reports that part of this decline was due to extraordinary costs in the first half of 2010 that included draining and cleaning the lake feature at the property. At Q1 2011, the property occupancy was at 76%, with a DSCR of 0.52x. The servicer reported in May 2011 that the property was being heavily marketed on CoStar and LoopNet, as well as through the use of local brokerage firms and property signage. The submarket is reportedly soft and leasing activity has been very slow. The current leverage on the asset is considered reasonable, at $97 psf; the loan is fully amortizing and matures in March 2013. DBRS has placed the loan on the DBRS HotList for close monitoring.
There are nine loans in special servicing, comprising 6.43% of the transaction balance. The two largest of these loans are discussed in detail below. As of the July 1, 2011 remittance report, there were six loans causing a total of $26.8 million in realized losses to the trust. Those losses have resulted in the elimination of Classes N and O and the unrated Class P. Furthermore, the Class M balance has been reduced by approximately 90% since issuance as a result of these losses. Of the $26.8 million in losses, approximately 56% is the result of five loans liquidated out of the trust between May 2010 and June 2011 at a weighted-average loss severity of 48.69%.

The remainder of the losses are due to the modification for Prospectus ID#6, Viad Corporate Center (2.77% of the current pool balance), which was finalized in June 2011 by the special servicer. The loan is secured by a 476,528 sf Class A office property located in the Uptown submarket in Phoenix, just north of McDowell Road on Central Avenue. The 24-story high-rise was constructed in 1991, originally serving as the national headquarters for the Dial Corporation. The property includes several retail units, auditorium and conference facilities, a fitness center, and a performing arts theater. The subject is located across the street from the Phoenix Art Museum and is a prominent fixture in the Central Avenue business district. The loan transferred to the special servicer in March 2009 when the 95% managing member in the borrowing entity cited difficulty making the scheduled interest payments on the loan and refused to contribute further equity into the property given the perceived value loss of approximately $60 million since issuance when the property was valued at $105.6 million. The May 2010 appraisal obtained by the special servicer valued the property at $43 million (a figure which represented an as-is value; the same firm concluded a stabilized value of $57.3 million for the subject property in May 2010), indicating the concern over value decline was substantiated. The property's performance has remained relatively stable since issuance. The YE2008 occupancy was at 93% and the DSCR was reportedly 1.25x, according to the special servicer. At YE2009, occupancy had fallen to 82% but the DSCR remained relatively healthy at 1.19x. Occupancy has remained near 80% throughout 2010 and into Q1 2011 when it 79%; the NOI DSCR for Q1 2011 was reported by the special servicer at 1.12x. In May 2011, the special servicer processed a sale of the property and loan assumption that resulted in a $9 million principal write down of the outstanding $65 million balance on the loan. As part of the transaction, the new borrower is to establish a capital reserve in the amount of $8 million to fund tenant improvements, leasing commissions, and capital repairs.

The realized loss of $9 million as a part of the loan assumption and modification was applied to the trust as part of the June 13, 2011 remittance report. DBRS anticipates additional losses as the special servicer fees and recoveries are collected in the coming months and added to the loss on this loan; the cumulative loss amount on this loan is estimated to be approximately $11.75 million, according to the special servicer. As such, the remaining loss figure should be contained to the Class M and L certificates, which had a respective balance of $231,383 and $5,265,000, as of the July 13, 2011 remittance report. These developments are in line with the DBRS projections for this loan at the time of the December 2010 review when Classes M and L were downgraded to C.

Prospectus ID#21, Holiday Inn Santa Maria (1.11% of the current pool balance), is the second-largest loan in special servicing. The loan is secured by a 207-unit full-service Holiday Inn hotel located in Santa Maria, California. Santa Maria is located approximately 65 miles north of Santa Barbara along the southern California coastline; the subject property is located in the north central section of the city, immediately west of Highway 101, which provides direct access to Pismo Beach approximately 20 minutes to the north. Hotel amenities include three meeting rooms, a fitness facility, outdoor swimming pool, and dining room. The hotel, like many hotels, has suffered from the market downturn and the resulting stress on income at the hotel as occupancy rates have fluctuated and room rates have been depressed. At YE2008 and YE2009, the DSCR was 0.97x and 0.59x, respectively; although occupancy for those periods remained near the underwritten level of 68%, the revenue at the property was significantly lower due to declining room rates at the property for those periods as compared with issuance. The Q1 2011 cash flow at the property is indicative of an annualized NOI DSCR of 0.67x. The loan had an initial IO period of two years, and began amortizing in April 2009. The current leverage of $108,000 per key is considered moderate, given the property's full-service status and location. In March 2010, the borrower requested relief and the loan transferred to the special servicer. The borrower requested a loan modification and was to submit a proposal to the special servicer, but it was never received and a foreclosure is in process, with a close anticipated in late Q3 2011. A receiver has been in-place at the property since September 2010; the loan is now due for the December 2010 payment and all payments due thereafter. The appraisal obtained by the special servicer in August 2010 indicated a property value of $24 million. Since that time, an updated appraisal from March 2011 has been received, valuing the property even lower at $15.5 million. This figure indicates a loss of approximately $10 million to the trust. DBRS will continue to closely monitor this asset's performance through the workout process.

DBRS shadow-rates 16 loans, representing 20.24% of the current pool balance . The shadow ratings indicate the long-term stability of the underlying assets, as represented in lower-than-average leverage points for the loans and above-average debt-service coverage ratios.. Based on the continued strong performance of the respective assets, DBRS has confirmed all 16 shadow ratings as listed below:.

One Dag Hammarskjold Plaza (7.41% of the current pool balance) – A (low)
Fullbright Tower (5.57% of the current pool balance) – BBB (low)
503 Broadway (1.48% of the current pool balance) – A (low)
Harmony Marketplace (1.41% of the current pool balance) – A (high)
Fox Chapel Shopping Center (0.77% of the current pool balance) – BBB (low)
Byram Plaza Shopping Center (0.72% of the current pool balance) – BBB (low)
HSBC Sioux Falls (0.68% of the current pool balance) – BBB (low)
38-05 to 38-17 and 37-27/29 Main Street (0.49% of the current pool balance) – BBB (low)
213 West 35th Street (0.49% of the current pool balance) – BBB (low)
Newbury Portfolio Roll-Up (0.49% of the current pool balance) – BBB (low)
Bridgeport Stop & Shop II (0.46% of the current pool balance) – BBB (low)
Rye Colony Apartment (0.38% of the current pool balance) – AAA
Westover Apartments (0.35% of the current pool balance) – BBB (high)
Whole Foods Santa Monica (0.26% of the current pool balance) – AA
36 Sutton Place South (0.25% of the current pool balance) – AAA
Tracy Towers (0.15% of the current pool balance) – AAA

As part of this review, DBRS closely analyzed the largest 15 loans in the pool, all 16 shadow-rated loans, all 49 loans on the servicer’s watchlist and all nine loans in special servicing. Together, these loans comprise 62.45% of the transaction balance.

DBRS continues to monitor this transaction on a monthly basis in the Monthly CMBS Surveillance Report, which can provide more detailed information on the individual loans in the pool.

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

The applicable methodology is CMBS Rating Methodology and CMBS North American Surveillance Methodology, which can be found on our website under Methodologies.