Proposed Law May Hurt CMBS

Tenant-friendly changes to New York state rent regulations will adversely affect several large New York City-based multi-family loans that back U.S. CMBS, according to a recent Fitch Ratings report that contends that resultant increased cash-flow stress as a result could lead to decreases in investment grades for these transactions.The new legislation would slow the pace of deregulation of New York City apartments by raising the minimum rent and tenant-income thresholds. According to Fitch managing director Eric Rothfeld, the increased threshold could delay conversion of stabilized units to market rents for eight years, hindering the ability of borrowers to remain current on debt service.Eight loans on New York City multi-family properties, exceeding $70 million, were included in Fitch-rated 2006 and 2007 CMBS transactions. These properties were financed with the expectation that cash flow would increase over time through conversion of regulated units to market rents or condominium sales.Under current regulations, New York City landlords cannot increase rental rates on rent stabilized units more than 4 percent annually until they reach $2,000 per month and the tenant’s income exceeds $175,000 for two consecutive years. The proposed legislation would  increase the rent trigger to $2,700 and the income trigger to $250,000. This can extend a unit’s participation in the rent-regulation program up to eight additional years.Three loans on New York City multi-family properties have greater risk of downgrade if the legislation passes. Each is secured by a property made up of more than 65 percent of rent-stabilized units, where rents range from $1,200 to $2,000 per month. At current rents, each of these properties cover current debt-service payments at less than 0.80x, with a number of units approaching the $2,000 per month rental trigger. New regulations would reduce the likelihood that the properties will generate sufficient cash flow to cover debt service throughout the loan term.The properties under scrutiny are Peter Cooper Village and Stuyvesant Town, an 80-acre apartment complex securing a $3 billion loan spread across four separate Fitch-rated transactions; The Belnord, a luxury apartment building on the Upper West Side that secures a $375 million loan included in JPMorgan 2007LPD9; and the Parkoff Eastside Portfolio, a $170 million loan in Morgan Stanley 2007-HQ12 secured by six apartment buildings on the Upper East Side.Fitch stressed the borrower’s business plan at issuance to account for slower-than-expected cash flow growth. The ratings agency noted that as a result of new legislation, it will review its probability of default and loss expectations for these loans. Exposures range from 8 percent to 20 percent of their respective transactions, so should cash-flow stress be realized, downgrades are likely to reach investment-grade classes, Fitch reported.