DBRS Assigns Rating to Class HOW of JPMBB Commercial Mortgage Securities Trust 2014-C26

DBRS Limited (DBRS) assigned a rating to the following class of Commercial Mortgage Pass-Through Certificates, Series 2014-C26 issued by JPMBB Commercial Mortgage Securities Trust 2014-C26:

-- Class HOW at BB (high) (sf)

The trend is Stable.

Class HOW is a non-pooled rake bond associated solely with the 543 Howard loan’s (Prospectus ID#20) $10 million subordinate B-Note.

The underlying collateral consists of the fee interest in a 72,987-square-foot office building located in the South Financial District of San Francisco. The whole-loan proceeds of $41.0 million, including a $10.0 million subordinate B-Note and borrower equity of $12,700, were used to retire existing debt; fund upfront reserves; and pay outstanding tenant improvement (TI)/leasing commission obligations. The property is 100% occupied across multiple leases by a Denver-based company known as Galvanize, Inc., which provides multi-dimensional working, entertaining and learning spaces for digital start-ups. The leases for 54.6% of the space expire in August 2030, with 39.1% of its space expiring in August 2029 and the remaining 6.3% of space expiring in February 2020.

The DBRS Net Cash Flow (NCF) is based on the “DBRS Commercial Real Estate Property Analysis Criteria.” DBRS accepted the in-place March 2018 rental revenue, applied a vacancy loss of 7.5% and generally based operating expenses on the figures reported by the servicer in the YE2017 analysis. The vacancy factor is above the overall Class B vacancy rate of 5.0% for the South Financial District submarket, according to CoStar, as of November 2018. DBRS applied TIs of $40.00 per square foot (psf) and $20.00 psf for new and renewal tenants, respectively, which are in line with the assumptions for the 580 Howard loan in the BANK 2017-BNK6 transaction. The resulting DBRS NCF is $3,178,427, representing a DBRS Term Debt Service Coverage Ratio (DSCR) of 1.10 times (x) compared with the DBRS Term DSCR at issuance of 0.98x. A letter of credit of $4.0 million was posted by the tenant at issuance and will be reduced to $3.0 million in September 2019 and $2.0 million in September 2024.

The DBRS value of $41.0 million represents a 25.2% discount to the issuance appraised value of $54.8 million. Per DBRS’s “North American Single-Asset/Single-Borrower Methodology,” the typical range of cap rates for office properties is 7.0% to 10.5%. Given the subject’s asset quality and excellent location in a gateway market, a cap rate toward the lower end of the range is warranted. As such, DBRS applied a cap rate of 7.75% to the DBRS NCF, which is generally in line with the cap rate applied to high-quality trophy assets in gateway markets, including Market Square, headquarters of Twitter Inc. (BBCMS 2015-MSQ), and 181 Fremont Street (secured in various transactions with the largest piece secured in BMARK 2018-B4).

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

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

The principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.