DBRS Morningstar Confirms All Ratings on 225 Liberty Street Trust 2016-225L, Removes Under Review with Developing Implications Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates issued by 225 Liberty Street Trust 2016-225L (the Issuer):

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X at A (sf)
-- Class C at A (low) (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

The Class X balance is notional.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The subject is an older trophy, Class A, 44-story office property in Lower Manhattan. Although the property is in the World Trade Center office submarket, which is considered secondary in the broader New York City office market, the subject’s location across from the World Trade Center site on the Hudson River is desirable, providing tenants with unobstructed river and city views, access to the Hudson River’s five-acre marina, and direct access to an underground transit concourse that connects to the Fulton Center, One World Trade Center, and the World Trade Center Transportation Hub. The collateral features a postmodern, tiered design with cascading set-backs at different floor levels of its facade, many of which have already been converted into outdoor terraces—a feature that sets the property apart from its competition. The subject is the largest of four towers that make up Brookfield Place, a mixed-use office development encompassing 7.1 million square feet (sf) of office space and roughly 340,000 sf of newly renovated, lifestyle-oriented retail and public space. The property is subject to a long-term ground lease with the Battery Park City Authority (BPCA), the annual rent under which is fixed at $5.1 million through its June 2069 expiry date. The subject is also obligated to the BPCA for payments in lieu of taxes, which are paid quarterly.

Encompassing 2.4 million sf, the subject was initially constructed in 1987 as the global headquarters for Bank of America Merrill Lynch (BAML). BAML net leased 100.0% of the property through its September 30, 2013, lease expiry, at which time it downsized considerably and gave back the majority of its space (roughly 2.1 million sf). Following lease expiry, the sponsor repositioned the subject alongside 200 Liberty Street, 200 Vesey Street, and 250 Vesey Street, as part of the larger Brookfield Place repositioning. The property received $71.6 million in capital upgrades, including a new building facade, upgraded fire alarm and building management systems, two new lobbies, and fully modernized elevators. Brookfield Place concurrently underwent a $211 million renovation that converted the complex’s lower retail space into a luxury shopping and dining destination. Roughly 60.0% of the retail space at Brookfield Place, representing 192,000 sf, is located at 225 Liberty Street and was 98.6% leased at issuance to a variety of luxury and upscale retailers and dining establishments. Occupancy at the property was 90.0% as of March 2020 and the servicer’s reported year-end 2019 net cash flow (NCF) was approximately $69.3 million, which reflects an increase of 2.2% over the Issuer’s concluded NCF of $67.85 million at issuance.

Loan proceeds of $900.0 million refinanced $802.0 million of debt, returned $11.7 million of equity to the sponsor, allocated $80.8 million to free rent reserves, and covered $5.5 million in closing costs. The $900.0 million whole mortgage loan consists of a $765.0 million trust loan, evidenced by a $324.0 million senior trust note and $441.0 million junior trust note as well as three companion loans totaling $135.0 million in aggregate.

The DBRS Morningstar NCF derived at issuance was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $60.8 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $900.7 million, a variance of -35.7% from the appraised value at issuance of $1.4 billion. The DBRS Morningstar Value implies an LTV of 99.9% LTV on the whole loan compared with the LTV of 64.3% on the appraised value at issuance. The NCF figure applied as part of the analysis represents a -10.4% variance from the Issuer’s NCF, primarily driven by rent-step credit, management fees, and tenant improvement and leasing costs.

The cap rate DBRS Morningstar applied is at the lower end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property’s favorable location, quality, and market position. In addition, the 6.75% cap rate DBRS Morningstar applied is above the implied cap rate of 4.85% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 5.75% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Class X is an interest-only (IO) certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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