DBRS Places Four Classes Under Review in COMM 2004-LNB3

DBRS has today placed the following classes of COMM 2004-LNB3 Under Review with Negative Implications:

-- Class G, rated BBB (high) (sf)
-- Class H, rated BB (high) (sf)
-- Class J, rated B (low) (sf)

Classes H and J had previously carried Negative trends. In addition, DBRS has placed Class F, rated A (low) (sf), Under Review with Developing Implications and has added the Interest in Arrears designation to Class G.

The rating actions follow an increase to interest shortfalls, which now affect the investment-grade-rated Class G. The increase to interest shortfalls is partially attributed to the higher appraisal subordinate entitlement reduction (ASER) amount for the largest loan in special servicing, Beau Terre Office Building, which has resulted in the continued reduction of interest advances.

Beau Terre Office Building (Prospectus ID#16, 3.83% of the current pool balance), has been in special servicing since May 2010. A 371,083 sf office property in Bentonville, Arkansas, serves as collateral for the loan. Occupancy at the subject has continued to decline, dropping from 93.2% at YE2008 to 63.7% at Q1 2010 and further to 45% according to a January 2012 rent roll. The asset is now real estate owned (REO) and the special servicer’s short-term strategy reportedly includes leasing up vacant space in order to stabilize the property. An appraisal dated June 2012 valued the property at $14.3 million, down from a value of $16.3 million as of June 2011 and an issuance value of $49.0 million.

In addition to changes in the Beau Terre Office Building, three modified loans that had previously been in special servicing continue to cause a small amount of interest shortfall each month. These loans, known as the Beyman Rollup (Prospectus ID#s 22, 23 and 24, 2.67% of the current pool balance combined) were modified in March 2011. Terms of the modifications included note splits into an A-note and a B-note. While both the A and B notes accrue interest at the original note rate, monthly interest payments are only payable on the A-note. The interest shortfall attributable to these loans is a result of the interest not being paid on the B-note balance. DBRS does not expect a full recovery of principal and interest to the three B-notes, whose aggregate balance at the time of modification was $8.3 million.

DBRS has minimal tolerance for interest shortfalls to investment-grade-rated classes; therefore, more information has been requested of the special servicer to better understand the extent of the interest shortfall contributions of the Beau Terre Office Building and the possibility of recovery in the event of liquidation. DBRS plans to perform a full surveillance review of this transaction in the coming months, at which time further determination on the previously noted classes placed under review will be made.

For additional detail on the DBRS viewpoint for this transaction, and for details on the largest loans in the pool, the loans in special servicing and the loans on the servicer’s watchlist, please see the August 2012 Monthly CMBS Surveillance Report for this transaction, which will be published shortly.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are CMBS Rating Methodology (January 2012) and CMBS North American Surveillance (May 2011), which can be found on our website under Methodologies.