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

DBRS has today downgraded the ratings of three classes of COMM 2004-LNB3 as follows:

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

Additionally, DBRS has confirmed the ratings on the remaining classes in the transaction, with the exception of Class P, which DBRS does not rate, and Class O, which is rated D (sf). The trend for Classes A-4 through G, including Class X, is Stable.

These actions were made in conjunction with the removal of Under Review with Developing Implications from Class F and the removal of Under Review with Negative Implications from Classes G, H and J. DBRS has also placed the Interest in Arrears designation on Class G.

The downgrades and Interest in Arrears designation follow an increase in interest shortfalls to classes previously rated investment grade, which is partially attributed to the higher appraisal subordinate entitlement reduction (ASER) amount for the largest loan in special servicing, Beau Terre Office Building. The most recent appraisal reduction for this loan occurred in August 2012, and the reduction amount was $24.5 million. This appraisal reduction event marks the third such event since the loan was transferred to special servicing, resulting in the continued reduction of interest advances.

Beau Terre Office Building (Prospectus ID#16, 3.8% of the current pool balance) has been in special servicing since May 2010. A 371,083 square foot 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% in January 2012. An updated August 2012 rent roll shows some pickup, with occupancy improving only slightly to 50%. 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.

Also of concern are three modified loans that had previously been in special servicing, which 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.

In addition to the above-noted ratings actions, DBRS has today confirmed the investment-grade shadow ratings for three loans, representing 31.9% of the current pool balance. Nine other loans, representing 20.2% of the current pool balance, are fully defeased. This brings the total number of loans in the pool that DBRS considers to be investment grade to 12, comprising more than half of the entire pool balance.

As part of its review, DBRS analyzed the top 15 loans, three loans in special servicing, loans on the servicer’s watchlist, three shadow-rated loans and the three loans known as the Beyman Rollup, which together comprise approximately 84.7% of the current pool balance.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction including details on the largest loans in the pool, the loans in special servicing and the loans on the servicer’s watchlist. The December 2012 Monthly Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

Notes:
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 Methodology (November 2012), which can be found on our website under Methodologies.