DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-DNZN to be issued by DNZN Commercial Mortgage Trust 2020-DNZN (DNZN 2020-DNZN or the Issuer):
-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X at AA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class HRR at BB (low) (sf)
The collateral for DNZN 2020-DNZN includes the borrowers' fee-simple interest in 11 multifamily and mixed-use properties totaling 1,198 multifamily units and 184,179 square feet of commercial space located throughout the Bushwick, Williamsburg, and Bedford-Stuyvesant neighborhoods of Brooklyn, New York. The transaction sponsor acquired or developed all properties in the portfolio between 2005 and 2019, and all properties have been either constructed or renovated since 2010. The largest asset in the portfolio, The Denizen, was delivered by the transaction sponsor in two phases between 2018 and 2019 and comprises two adjoined luxury multifamily properties (54 Noll Street and 123 Melrose Street) totaling 911 units (76.0% of the portfolio’s total unit count). The sponsor will use the $652.0 million whole loan to refinance $371.3 million of existing debt on the portfolio, pay down $247.4 million in secured Tel Aviv Stock Exchange (TASE) bonds, fund an $18.0 million economic holdback, cover $15.8 million of closing costs associated with the transaction, finance $11.4 million of reserves, and return $6.0 million of equity to the transaction sponsor. The sponsor is entitled to $1.3 million of partnership distributions while the remaining return of equity must be applied to outstanding unsecured TASE bonds linked to the underlying properties.
The sponsors for this transaction are All Year Holdings Limited, All Year Holdings LLC, and Yoel Goldman. All Year Holdings is a New York-based development company that Goldman founded in 2005. Goldman reported ownership and management interests in 131 commercial properties totaling more than $2.4 billion in market value throughout the Brooklyn area. In addition to The Denizen, the sponsor also developed The William Vale hotel as well as The Delmar, The Azure, and The Dean luxury multifamily buildings between 2016 and 2017.
The mortgage loan comprises two pari passu senior notes with an aggregate principal balance of $293.9 million, a number of pari passu companion loan notes with an aggregate principal balance of $100.0 million, and two junior notes with an aggregate principal balance of $116.1 million for a total mortgage loan balance of $510.0 million, excluding $160.0 million of mezzanine debt that is subordinate to the senior notes, companion loan notes, and junior notes. The companion loan notes are pari passu with the senior notes in right of payment and, together with the senior notes, are generally senior in right of payment to the junior notes. The Trust Loan is part of the whole mortgage loan balance and consists of the two senior trust notes, including the controlling senior note, and the two junior trust notes for a total trust balance of $410.0 million. The $100.0 million in companion loans will not be assets of the Issuer.
DBRS Morningstar’s outlook on the stability of multifamily assets in and around the New York Metro area and into the surrounding Brooklyn neighborhoods has historically been positive because the region is considered a top-tier, super-dense urban market and the global epicenter for banking and financial services. The collateral’s Kings County submarket has exhibited especially favorable growth trends in recent years, with double-digit inventory growth rates matched by stable absorption over the five-year period ended December 31, 2019, driven by the area’s offering of relatively affordable housing compared with Manhattan and proximity to many commuter transit options. Nonetheless, the ongoing Coronavirus Disease (COVID-19) pandemic continues to pose challenges and risks to virtually all major commercial real estate property types. Due in large part to its dense population and prominence as a global destination for business and leisure travel, New York was considered a national epicenter of the coronavirus. The New York City Health Department specifically described Brooklyn as a hotspot for the coronavirus as of October 16, 2020. The coronavirus pandemic has caused a citywide mass exodus with Forbes recognizing a rise in multifamily vacancy rates coupled with a 6.6% drop in the median net rent price in the Manhattan multifamily market in summer 2020. However, whether the pandemic-spurred mass exodus will be sustained remains highly uncertain and Reis, Inc. forecasts that the collateral’s submarket will continue to exhibit relatively stable construction/absorption trends and vacancy rates through the five-year period ending December 31, 2024.
DBRS Morningstar generally views the asset quality of the underlying properties in this transaction favorably. The Denizen, which represents 76.0% of the portfolio’s total unit count, offers superb Class A finishes complemented by a plethora of luxury amenities. While eight properties, representing 16.7% of the portfolio’s total residential units, are relatively dated given that they were constructed between 1900 and 1930, the transaction sponsor invested an undisclosed amount of capital into renovating such properties between 2010 and 2013. While DBRS Morningstar was unable to tour the interiors of all units, based on sponsor- and appraisal-provided interior photographs, all properties generally exhibited modernized interior finishes. The sponsor constructed the remaining three assets between 2015 and 2019 and DBRS Morningstar generally found these assets to be of Average or Average (+) property quality. The transaction sponsor’s development, ownership, and management experience throughout the Brooklyn area provides additional comfort regarding the portfolio’s performance stability as DBRS Morningstar generally takes favorable views on sponsorship with pre-existing knowledge and experience in the asset location.
Eight assets, representing 88.6% of portfolio’s total unit count, benefit from some form of tax abatement, which poses moderate refinance risk as future rises in tax rates resulting from the loss of such benefits could diminish the value of the underlying collateral as derived through income capability. However, tax abatement benefits throughout the portfolio are generally correlated with the provision of affordable housing units; such units are generally considered to be leased at below-market rates to make them affordable to tenants with limited income. As a result, loss of tax abatement benefits might also result in the ability to lease such affordable units at market-rate rents, potentially offsetting reductions in net cash flow otherwise incurred from a loss of abatement benefits. The portfolio’s favorable location in a super-dense urban market, the surrounding Brooklyn multifamily market’s strong fundamentals, and the sponsor’s experience in the local market all reinforce DBRS Morningstar’s comfort in the portfolio’s ability to maintain cash flow stability.
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.
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All figures are in U.S. dollars unless otherwise noted.
With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.
The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020), 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 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.
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