DBRS Downgrades Three Classes and Confirms 13 of COMM 2004-LNB3

DBRS has today confirmed thirteen classes of COMM 2004-LNB3 as follows:

-- Classes A-1A, A-4, A-5, B and X at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)
-- Class E at A (sf)
-- Class F at A (low) (sf)
-- Class G at BBB (high) (sf)
-- Classes L, M and N at C (sf)

DBRS has also downgraded three classes of COMM 2004-LNB3 as follows:

-- Class H to BB (high) (sf) from BBB (low) (sf)
-- Class J to B (low) (sf) from B (sf)
-- Class K to C (sf) from CCC (sf)

In addition, Class H has added Interest in Arrears and has been noted as such. Classes J, K, L, M and N previously had Interest in Arrears and the designation remains in place.

The downgrades are a result of projected losses for the loans in special servicing, with particular attention to the status of Beau Terre Office Building (Prospectus ID#16, 3.82% of the current pool balance).

Beau Terre Office Building (Prospectus ID#16) is secured by a 373,884 sf office property in Bentonville, Arkansas. This loan transferred to special servicing in May 2010 for imminent default. Bentonville is the corporate headquarters for Wal-Mart Stores, Inc. (Wal-Mart) and new office supply grew significantly from 2005 through 2007 following Wal-Mart’s public announcement that it preferred to use local suppliers. The community’s office market suffered when Wal-Mart relocated its apparel division to New York. Units at this property are smaller in nature, with the largest tenant, ConAgra Food Sales, representing 4.9% of the net rentable area (NRA). A June 2011 appraisal suggests a property value of $16.3 million, representing 211% of the outstanding loan balance. Following the reduced appraised value, the appraisal subordinate entitlement reduction (ASER) amount related to this loan was increased by approximately $40,000, causing interest shortfalls to spill into Class H. The property is now real estate owned (REO) and the short-term strategy reportedly involves leasing up vacant space in order to stabilize the asset. DBRS believes that the projected loss severity associated with the liquidation of this property will hinge on the success of this stabilization period; the success may actually increase recovery over the current appraised value.

The uncertainty surrounding the timing of the liquidation of Beau Terre Office Building (Prospectus ID#16) and the second loan in special servicing, Cordova Shops (Prospectus ID#68, 0.3% of the current pool balance), as well as the increase to interest shortfalls has contributed to the downgrade of Class H, Class J and Class K. In addition, DBRS has today placed Class H and Class J on Negative trend due to the limited credit enhancement that would be available to these classes if DBRS’s liquidation scenario of $22.1 million should materialize.

DBRS continues to monitor this transaction on a monthly basis, with increased focus on these pivotal loans and the other loans currently on the servicer’s watchlist. As a whole, the transaction has exhibited stable performance, with observed improvement over time. The current weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield for the pool are 1.9 times (x) and 14.1%, respectively. In comparison, the WA DSCR and WA debt yield at issuance were 1.6x and 10.3%, respectively. Several of the original top ten loans have paid out of the pool, contributing to the full principal repayment of Class A-1, Class A-2 and Class A-3, as well as significant pay down to Class A-4. The transaction has significant bar-belled performance, benefiting from its volume of fully defeased loans (19.4% of current pool balance) and the three largest loans (31.8%) which are shadow-rated investment-grade by DBRS.

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

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