Polen CMBS B Piece

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010
www.baruch.cuny.edu/realestate
Introduction
C
ommercial mortgage-backed
securities (CMBS) investors
have learned, if nothing else
than out of necessity, how to split the
check. During the real estate boom,
investors modeled senior CMBS bonds
with minimal prepayment risk and were
willing to discount the probability of
losses to junior CMBS bonds. In today’s
distressed environment, CMBS investors
face increased default and prepayment
risk as a result of special servicers selling
nonperforming loans and real estate
owned (REO) properties. It is imperative
for CMBS investors, or those who wish
to gain knowledge of the subject,
to understand how to evaluate both
commercial mortgage credit and CMBS
cashflows (or waterfalls) to translate these
vague fears and worries into actionable
information.
This white paper uses special servicer
data and ratings agency methodologies
to analyze CMBS loans. By applying
this analysis, investors are empowered
to make their own determinations on
pricing and risk for CMBS, essential tools
for portfolio management and CMBS
trading decisions (“secondary” CMBS).
CMBS is created by splitting the cash flow
from commercial mortgages into different
bonds, known as tranches. Commercial
real estate investors with an opportunistic
strategy may appreciate how their skills can
be used to identify pricing discrepancies
that then impact structured real estate
finance. Structured finance investors can
use this article to appreciate the impact that
unique attributes of individual real estate
assets have on CMBS investments.
Problematic deals that special servicers
are now tasked with resolving are numerous.
In fact, about 8% of all outstanding CMBS
deals are delinquent as of September 2011,
according to Morningstar.
This article uses actual loans and CMBS
SPRING 2012 RESEARCH PUBLICATION
Predicting CMBS
Prepayments and Defaults
The Impact of Distressed Real Estate Loans on CMBS Performance
A research report prepared for the Steven L. Newman Real Estate Institute by Benjamin Polen, Senior Research Associate at the Institute.
I had been getting
something for nothing.
That only delayed the
presentation of the bill.
The bill always came.
~ Ernest Hemingway
The Sun Also Rises
issuances, as well as a high profile
building, to illustrate risk to CMBS
investors. Special servicer estimates and
market information are applied to assess
potential impacts on CMBS tranches.
Ratings agency methodologies are
applied to analyze current net operating
income (NOI) and estimate refinancing
proceeds. Investors can apply these same
techniques to managing CMBS portfolios
or when underwriting prospective CMBS
investments.
Risk
In a bullish real estate market, most
investors expect both mortgages and
structured CMBS to perform as originally
modeled. When cash flows from real
estate can no longer support the debt
service due to a weak real estate market,
this generates risk for CMBS lenders.
CMBS tranches allow investors a choice of
risk. Senior bonds offer lower yields, but
are created with credit support, which has
generally succeeded in insulating them
from defaults. The CMBS issuance used
as an example in this article, WBCMT
2006-C23, was created with 30% credit
support. Junior bonds have less credit
support but offer the opportunity for
higher returns. Junior bonds will be the
first to absorb any losses from defaults.
Prepayment risk represents an early
return of principal, eliminating future
interest cashflows that would otherwise
be made to bondholders. This risk was
thought to be generally mitigated by
lockout periods, defeasance and penalty
fees. Rarely was serious consideration
given to substantial prepayments
resulting from distressed sales. Investors
Three Columbus Circle
Photograph credit: Benjamin Polen
Figure 1:

– 2 –
PREDICTING CMBS PREPAYMENTS AND DEFAULTS SPRING 2012
in today’s CMBS market need to pay careful
attention to default and prepayment risks
and their impact influence on total returns.1
Default risk stems from loan losses,
ultimately correlated with a borrower’s
ability to refinance a loan, the causes
of which are property specific. Recent
property income information can be used
to re-underwrite a loan from a lender’s
perspective and determine refinancing
proceeds. If expected refinancing proceeds
are less than the loan exposure, CMBS
investors face default risk.
In CMBS, nonperforming mortgages
are sent into “special servicing,” where a
special servicer (predesignated at CMBS
issuance) decides whether to engage in
a workout, sell a nonperforming note or
foreclose (leading to REO). Each of these
decisions will have a different effect on
CMBS investors. Understanding special
servicer decisions and the resulting impact
on CMBS is key for investor underwriting.
For example, a note sale results in an
unexpected cash inflow, but the servicer
is obliged to distribute cash according to
the structured formula. This was the case at
Three Columbus Circle, as detailed in the
next section of this paper, when the loan
sale resulted in a prepayment. Another
option for a special servicer is a workout or
modification. One modification technique
that has been used frequently is a loan
extension on the same terms, such as a one,
two or three years. While a loan extension
can help keep a borrower current, it does
so at the continued risk to CMBS investors.
Principal payments, including
prepayments resulting from an REO or
loan sale, flow first to a senior bond. Cash
proceeds resulting from a loan or property
sale are distributed to the CMBS tranches
that are first in line to receive principal
payments. In the event of a significant
principal prepayment, this can have a
Figure 2:
WBCMT-C23 Senior Bond Prices via Bloomberg Data History (BDH)
material effect on the bond price and yield. For investors who bought into three to five
year bonds with a perception of an AAA safe and steady yield, receiving a large principal
prepayment could shorten the average life down to one to three years. This reduces both
yield and total return.
How a NYC Office Loan Impacts CMBS
In New York, the $250 million securitized loan on Three Columbus Circle (aka 1775
Broadway, the former Newsweek building) and its sponsor, Joe Moinian, is familiar to many
real estate professionals. The Three Columbus Circle loan was securitized into WBCMT 2006-
C23. The building, shown in Figure 1, underwent an extensive renovation and repositioning
process, which resulted in a low occupancy of 68% as tenants left during the disruptions.
The mortgage was sold to the Related Companies by special servicer CW Capital, resulting
in a large $250 million prepayment to senior CMBS investors. (SL Green later partnered
with Moinian in a recapitalization and paid off the Related-owned mortgage.) While junior
CMBS investors were protected from a loss, senior bondholders saw the market price of
their bonds drop as a result of the reduction in interest cashflows. This effect is illustrated in
Figure 2. The repayment and the impact on senior bondholders could have been predicted
through an understanding of structured finance and the CMBS issuance.
The CMBS loan on Three Columbus Circle, originated in 2006, was structured with a
four-year, interest-only period and a scheduled amortization period starting in February
2010. This amortization increased debt service by 20%, from $14.4 million to $17.4 million.
According to press reports, when Moinian was unable to refinance the building, he hoped
to negotiate an extension of the interest-only period. In order to do so under CMBS
structure, it was necessary to deliberately skip loan payments in order to transfer the loan
into special servicing. Unlike bank lending, a CMBS borrower cannot rely on a transactional
1 These risks are formally known as constant default rate
(CDR) and conditional prepayment rate (CPR).

– 3 –
relationship or goodwill in a workout. In this instance, the missed payments triggered a
material default of the loan.
A loan modification is generally employed when there are few other palatable alternatives,
including a lack of interested buyers and the inability to refinance. Given market reports
about the borrower’s various failed attempts to refinance the loan, he may have viewed this
as a sign of the market’s lack of appetite for the collateral. A calculated risk of withholding
loan payments to force a modification may have been rational, but perhaps it was the
borrower’s only choice. From the special servicer’s perspective, tasked with maximizing
proceeds to the trust, selling this loan quickly was an easy choice to make. To date, 2006
vintage CMBS deals have had the second highest losses (Figure 3).
The ability to identify likely loan resolution outcomes is the first step to estimating the
impact on CMBS. For example, an analysis of the distressed loan on Three Columbus Circle
could reasonably determine sufficient demand for the first mortgage loan, based on the
property’s location, size and loan to value (LTV) ratio. With a loan balance of $250 million,
this represented a collateralization of $404 loan/square foot. Even with additional required
redevelopment costs, this opportunity is a compelling deal, given the property’s frontage
on 57th Street and its proximity to Columbus Circle. It is therefore a reasonable possibility
that the special servicer could sell the loan at or near its par value of $250 million.
The next step is in understanding the impact of a $250 million prepayment would have
on the CMBS trust. In The Handbook of Mortgage Backed Securities, Jacob, Manzi,
and Fabozzi wrote, “For large loan pools, CMBS investors should identify the loans that
influence a given bond the most and then develop plausible prepayment scenarios to reveal
the bond’s performance activity.”2
At Three
Columbus Circle, plausible prepayment
scenarios would certainly include the
payment of the full $250 million amount.
What if the special servicer had extended
the loan? CMBS bondholders will have
different viewpoints depending on the
tranche owned. Distressed real estate
loans held inside a CMBS conduit may be
resolved in several ways by the special
servicer, including an outright sale of the
loan or foreclosure and sale of the real
estate asset.
Besides a sale of the loan (or foreclosed
property), other resolution strategies
include a modification of loan terms,
an extension of balloon payment or
receivership. Each will have a different
impact on bondholders. In this case, a loan
extension would have helped the senior
A-PB tranche, which would not have taken
such a large prepayment and subsequent
hit on its market price (Figure 2).
Exploring CMBS Risk
Real estate professionals can use
their market knowledge to estimate the
likelihood of prepayments and losses on
CMBS conduits. For example, applying
market cap rates to property income will
derive a property value. A loan amount,
based on 65% loan-to-value ratio, can
then be backed out of the property value.
Alternatively, one could apply a required
debt service coverage ratio and interest
rate to determine the property’s ability to
support a refinancing.
When refinancing proceeds are less than
the loan balance, loss and prepayment
estimates are applied to their corresponding
junior and senior tranches. Near-term
(within 12 months) prepayments and losses
are most likely to immediately occur from
the sale of properties or delinquent loans
2 Handbook of Mortgage Backed Securities, Chapter
50, “The Impact of Structuring on CMBS Bond Class
Performance” by David P. Jacob, James M. Manzi and
Frank J. Fabozzi.
Figure 3:
Cumulative CMBS Losses by Vintage (Bloomberg)

– 4 –
controlled by the special servicer (as was
the case with Three Columbus Circle).
Fortunately, it is possible for investors
to access the information maintained
by special servicers that describes both
delinquent loans and foreclosed properties,
also known as the previously mentioned
REO.
REO Generates High Prepayment Risk
REO assets are destined to be sold by
the special servicer, most likely in the near
term. While it is true that a special servicer
may hire a management company to lease
a REO property and attempt to increase
the property value, this strategy can take
more than a year to implement. Thus, REO
properties provide the highest likelihood
for prepayment. According to the special
servicer’s reports on WBCMT 2006-C23,
there are eight REO loans with a total
principal balance of $87.7 million and a
total loan exposure of $98.6 million.3
The special servicer estimates REO
sales at 90% of the most recent value,
which would result in a prepayment of
$57.8 million (Figure 4). As a result, there
is a total potential loss risk estimated at
$40.8 million (Table 1), representing the
shortfall between sale proceeds and total
loan exposure. The $57.8 million of cash
flow would go to the senior tranches and
repay servicer advances. Considering the
current balance of the senior A-PB tranche
is $66.4 million, this prepayment would pay
down 87% of that bond’s principal balance
(Figure 6). Senior bond investors would
suffer from high principal repayments and
risk an inability to replace those yields in
current markets. The losses of $40.8 million
3 The total exposure balance reflected in the loss estimates
includes advances made by the special servicer. These
advances include principal and interest, along with
property management and loan sale expenses. Since
proceeds from a loan sale are first used to repay servicer
advances before paying down bond classes, a long, drawn
out and expensive loan battle can hurt recoveries to both
junior and senior investors. In WBCMT 2006-C23,
the REO loans have a total of $10.9 million in servicer
advances.
Figure 4:
WBCMT 2006-C23 REO & Potential Losses based on Special Servicer Estimates as of September
2011 (Special Servicer Report)
REO could result in a $57.8 million prepayment to senior tranches, and write down the junior tranches with $40.8 million in losses.
Table 1:
WBCMT 2006-C23 loss & prepayment risk from delinquent and REO loans as of September 2011
REO $40,811,082 $57,775,500
Delinquent $53,751,743 $112,197,899
Total $94,562,824 $169,973,399
Loan Status Loss Risk Prepayment
WBCMT 2006-C28 $318,034
Deal Name REO Loa
Balance
WBCMT 2006-C28 ($72,044,342) 1
Deal Name Loss Risk Ranking

– 5 –
Figure 5:
WBCMT 2006-C23 Potential Losses from Delinquent Loans based on Special Servicer Estimates as of
September 2011. (Special Servicer Report & author’s analysis)
Delinquent loans could result in a $112 million prepayment to senior tranches and a write down of the junior tranches with $53.8 million in
losses. (Note: Two loans are not expected to have losses.)
would write down the balance of the junior
tranches, wiping out the entire balance of
the most junior S tranche (Figure 7).
Applying this analysis to the CMBS
universe, a review of the ten largest REO
loans shows the CMBS deals and their
corresponding risk exposure (Table 2). The
REO with the largest loan balance is a mall
in California, built in 1968. The CMBS trust
has $190 million in loan exposure, but the
special servicer estimates the property
valued at $153 million, a $37 million deficit
to the loan balance. However, a portfolio of
Southeast office buildings has the greatest
loss risk of REO loans, with $68.3 million in
loss exposure on a $180.9 million loan that
is valued at only $112.64 million. Investors
in those CMBS deals should be cognizant
of the prepayment and default risk at hand.
The CMBS deals associated with those loans
have some of the highest REO loan balances
and REO loss risk exposures (Tables 3 and
4). The prepayment risk to specific CMBS
bonds is noted in these tables. The largest
REO loan balance, the California mall,
would prepay the A2 bond of the WBCMT
2006-C28 issuance. The REO loan with
the greatest risk loss, the Southeast office
portfolio, would prepay JPMCC 2005-CB13
A2FL. The Bloomberg CMBS tool makes
it easy to identify prepayment risk up the
collateral chain, from loan to CMBS deal.
Delinquent Loans Are Troublesome,
Special Servicer Options
The next, or even equally risky basket of
REO $40,811,082 $57,775,500
Delinquent $53,751,743 $112,197,899
Total $94,562,824 $169,973,399
Rank Loan Name Deal Target Bond State Property
Type
Current Trust
Balance
Recent Value Value Date Loss Risk
1 Montclair Plaza(2) WBCMT 2006-C28 A2 CA Retail $190,000,000 $153,000,000 2/3/2011 ($37,000,000)
2 DRA-CRT Portfolio I JPMCC 2005-CB13 A2FL Various Office $180,900,000 $112,640,000 n/a ($68,260,000)
3 Ariel Preferred Retail Portfolio GSMS 2006-GG8 A2 Various Retail $90,009,189 $65,650,000 n/a ($24,359,189)
4 Moreno Valley Mall CGCMT 2007-C6 A1 CA Retail $84,565,377 $42,700,000 10/17/2011 ($41,865,377)
5 FRI Portfolio BACM 2005-3 A2 Various Office $70,000,000 $37,825,000 8/19/2011 ($32,175,000)
6 Highland Mall JPMCC 2002-CIB4 A3 TX Retail $61,104,416 $128,000,000 6/1/2001 n/a
7 Windsor/RECP Hotel Portfolio GCCFC 2005-GG5 A2 CA Hotel $53,783,787 $50,400,000 12/16/2010 ($3,383,787)
8 55 Park Place BACM 2006-4 A3A GA Office $51,303,123 $42,000,000 5/20/2011 ($9,303,123)
9 Four Seasons Nevis WBCMT 2007-WHL8 A1 Various Hotel $51,000,000 $110,000,000 9/27/2010 n/a
10 Tower Place 200 GSMS 2006-GG8 A2 GA Office $50,500,000 $27,050,000 6/1/2011 ($23,450,000)
WBCMT 2006-C28 $318,034,342 1
JPMCC 2005-CB13 $180,900,000 2
GSMS 2006-GG8 $179,805,189 3
CWCI 2006-C1 $110,753,000 4
GCCFC 2005-GG5 $107,753,000 5
BACM 2005-3 $96,500,000 6
CSFB 2001-CKN5 $89,930,399 7
CGCMT 2007-C6 $87,702,073 8
BACM 2006-4 $74,127,123 9
GSMS 2005-GG4 $71,022,826 10
Deal Name REO Loan
Balance
Ranking
WBCMT 2006-C28 ($72,044,342) 1
JPMCC 2005-CB13 ($68,260,000) 2
GSMS 2006-GG8 ($65,405,189) 3
CWCI 2006-C1 ($56,030,399) 4
GCCFC 2005-GG5 ($43,027,073) 5
BACM 2005-3 ($38,785,404) 6
CSFB 2001-CKN5 ($37,875,000) 7
CGCMT 2007-C6 ($22,703,000) 8
BACM 2006-4 ($22,701,636) 9
GSMS 2005-GG4 ($19,763,991) 10
Type
Current Trust
Balance
1 Trinity Hotel Portfolio BACM 2006-5 A2 Various Hotel $127,777,001 $113,120,000 1/13/11 ($14,657,001)
JPMCC 2005-CB13 $167,946,611
BACM 2006-5 $127,777,001
JPMCC 2004-CBX $88,000,000
GSMS 2005-GG4 $83,125,000
GMACC 2006-C1 $70,988,785
GCCFC 2005-GG3 $67,727,758
CSMC 2007-C1 $64,000,000
LBFRC 2006-LLFA $57,361,673
BACM 2006-1 $55,000,000
BACM 2005-3 $50,923,880
Deal Name Foreclosure Loan
Balance
Table 2:

– 6 –
estimates described herein.
Both REO and delinquent loans also
present a serious prepayment risk for senior
tranches. If these loans were prepaid within
the next 12 months, it would completely
prepay the A-PB class and also prepay a
portion of the A-4 tranche, which are the
next level of senior bonds. Investors who had
recently purchased these bonds expecting
stable yield would be disappointed with the
quick return of their principal and a lack of
interest income.
Investor Identification & Analysis of
Distressed CMBS Loans
After REO and delinquent loans, an
investor can identify other problem CMBS
loans. The next most immediate concern
is from other troubled loans that are likely
to be classified as delinquent or perhaps
transferred to the special servicer through
foreclosure. A quick and helpful way to
determine which loans fall into this category
is by looking at the debt service coverage
ratio of the loan. For the WBCMT 2006-
C23 securitization, there are 44 loans with a
debt-service coverage ratio (DSCR) of 1.00
or less.5
These loans have a current balance
of $746.3 million. There are 10 loans with
a DSCR under 0.50 and with a cumulative
loan balance of $62.1 million (Table 5).
CMBS loans in foreclosure represent
significant prepayment and default risk
to investors (Tables 6 and 7). The top ten
largest loans in foreclosure represent $130
million in loss risk and uncertainty to their
CMBS bondholders. If these losses are fully
realized, it would generate a 19.5% loss on
the $663 million in loan exposure.
Once risky loans are identified, how does
one evaluate them and assess potential
losses or prepayments? Moody’s CMBS
standards re-underwrite existing CMBS in
Table 5:
WBCMT 2006-C23 loans with debt service coverage under 1.0 as of September 2011
Potential losses and prepayments are estimated using Moody’s methodology
0 to .24 $34,588,791 $543,958 $34,864,221 7
.25 to .49 $27,554,229 $3,584,132 $23,970,097 3
.50 to .74 $279,996,485 $32,947,218 $247,049,267 9
.75 to .99 $404,115,453 $78,864,315 $325,251,138 25
Total $746,254,958 $115,939,623 $631,134,724 44
Reported DSCR Loan Balance Est. Prepayment Est. Loss Loans
rentTrust
alance
RecentValueValueDateLossRisk
90,000,000$153,000,0002/3/2011($37,000,000)
80,900,000$112,640,000n/a($68,260,000)
90,009,189$65,650,000n/a($24,359,189)
84,565,377$42,700,00010/17/2011($41,865,377)
70,000,000$37,825,0008/19/2011($32,175,000)
61,104,416$128,000,0006/1/2001n/a
53,783,787$50,400,00012/16/2010($3,383,787)
51,303,123$42,000,0005/20/2011($9,303,123)
51,000,000$110,000,0009/27/2010n/a
50,500,000$27,050,0006/1/2011($23,450,000)
rrentTrust
Balance
RecentValueValueDateLossRisk
$127,777,001$113,120,0001/13/11($14,657,001)
$107,030,785$91,500,00012/14/10($15,530,785)
$88,000,000$50,300,00012/20/10($37,700,000)
$70,988,785$397,650,0007/1/05n/a
$64,000,000$35,000,0003/24/10($29,000,000)
$56,100,000$46,850,000n/a($9,250,000)
$55,000,000$85,100,0001/19/11n/a
$49,058,499$32,200,0003/1/11($16,858,499)
$45,371,159$39,300,000n/a($6,071,159)
$42,200,000$40,000,0004/7/11($2,200,000)
MCC2005-CB13$167,946,611
ACM2006-5$127,777,001
MCC2004-CBX$88,000,000
SMS2005-GG4$83,125,000
MACC2006-C1$70,988,785
CCFC2005-GG3$67,727,758
SMC2007-C1$64,000,000
FRC2006-LLFA$57,361,673
ACM2006-1$55,000,000
ACM2005-3$50,923,880
DealNameForeclosureLoan
Balance
4 The eleven delinquent loans in this deal have a total
principal balance of $159.6 million, but when servicer
advances are included there is an additional $7.0 million
in loan exposure.
5 This excludes the loan on the property at 620 Sixth
Avenue, which has been recapitalized, according to press
reports.
REO $40,811,082 $57,775,500
Delinquent $53,751,743 $112,197,899
Total $94,562,824 $169,973,399
Type
Curr
Ba
1 Montclair Plaza(2) WBCMT 2006-C28 A2 CA Retail $19
2 DRA-CRT Portfolio I JPMCC 2005-CB13 A2FL Various Office $18
3 Ariel Preferred Retail Portfolio GSMS 2006-GG8 A2 Various Retail $9
4 Moreno Valley Mall CGCMT 2007-C6 A1 CA Retail $8
5 FRI Portfolio BACM 2005-3 A2 Various Office $7
6 Highland Mall JPMCC 2002-CIB4 A3 TX Retail $6
7 Windsor/RECP Hotel Portfolio GCCFC 2005-GG5 A2 CA Hotel $5
8 55 Park Place BACM 2006-4 A3A GA Office $5
9 Four Seasons Nevis WBCMT 2007-WHL8 A1 Various Hotel $5
10 Tower Place 200 GSMS 2006-GG8 A2 GA Office $5
WBCMT 2006-C28 $318,034,342 1
JPMCC 2005-CB13 $180,900,000 2
GSMS 2006-GG8 $179,805,189 3
CWCI 2006-C1 $110,753,000 4
GCCFC 2005-GG5 $107,753,000 5
BACM 2005-3 $96,500,000 6
CSFB 2001-CKN5 $89,930,399 7
CGCMT 2007-C6 $87,702,073 8
BACM 2006-4 $74,127,123 9
GSMS 2005-GG4 $71,022,826 10
Deal Name REO Loan
Balance
Ranking
WBCMT 2006-C28 ($72,044,342) 1
JPMCC 2005-CB13 ($68,260,000) 2
GSMS 2006-GG8 ($65,405,189) 3
CWCI 2006-C1 ($56,030,399) 4
GCCFC 2005-GG5 ($43,027,073) 5
BACM 2005-3 ($38,785,404) 6
CSFB 2001-CKN5 ($37,875,000) 7
CGCMT 2007-C6 ($22,703,000) 8
BACM 2006-4 ($22,701,636) 9
GSMS 2005-GG4 ($19,763,991) 10
Type
Cu
1 Trinity Hotel Portfolio BACM 2006-5 A2 Various Hotel $
2 The Shore Club JPMCC 2005-CB13 A2FL FL Hotel $
3 Continental Plaza JPMCC 2004-CBX A5 NJ Office
4 DDR/Macquarie Mervyn’s Portfolio GMACC 2006-C1 A3 Various Retail
5 717 North Harwood Street CSMC 2007-C1 A1A TX Office
6 Investcorp Porfolio JPMCC 2005-CB13 A2FL PA Industrial
7 Fairmont Sonoma Mission Inn & Spa BACM 2006-1 A2 CA Hotel
8 Novo Nordisk Headquarters CGCMT 2005-C3 A2 NJ Office
9 Birtcher/Charlesbank Office Portfolio GCCFC 2005-GG3 A2 CA Office
10 Four Falls GSMS 2005-GG4 A2 PA Office
JPM
BA
JPM
GS
GM
GC
CS
LB
BA
BA
Table 4:
CMBS deals with largest REO loss risk
Loss Risk is the REO Loan Balance subtracted from Most Recent
Property Value
loans in CMBS and WBCMT 2006-C23 are known as delinquent loans. The special servicer
has discretion to choose a resolution of delinquent loans and may choose to sell a loan
(resulting in prepayment), foreclose on the property (leading to REO) or modify the loan (by
extending a balloon payment or scheduled amortization, for example). A loan modification
typically results in the loan being transferred out of special servicing and reducing the near
term prepayment risk.
The loan on Three Columbus Circle loan was categorized as delinquent until it was
sold (in defiance of the borrower’s requested workout). WBCMT 2006-C23 currently has
eleven delinquent loans which represent $166.6 million in loan exposure.4
Unfortunately
for bondholders, the properties are valued at $133.1 million, a deficit to their loan balances
(Figure 5). However, since the balances are allocated on an individual loan basis, two of
the properties are valued greater than their loan exposure. Those deals still have equity
and a chance of refinancing. The special servicer estimates a sale price at 90% of value.
A payment of 90% of the approximate value of $133.1 million would first repay servicer
advances of $7.0 million and then be applied towards principal repayment of $112.2 million.
In total, the delinquent loans could result in a $53.8 million loss, which would write down
the junior tranches. By analyzing the REO and delinquent loans, it is possible to estimate
a total prepayment risk of nearly $170 million and potential losses to junior tranches of
$94.6 million (Table 1, Figure 7). A write down of $94.6 million to junior tranches would
completely wipe out the S, Q, P, O, and N tranches, and 93% of the M tranche. Holders of
those tranches would benefit if these loans were extended or if recoveries exceeded the
82 $57,775,500
43 $112,197,899
24 $169,973,399
Prepayment
0to.24$34,588,791$543,958$34,864,2217
.25to.49$27,554,229$3,584,132$23,970,0973
.50to.74$279,996,485$32,947,218$247,049,2679
.75to.99$404,115,453$78,864,315$325,251,13825
Total$746,254,958$115,939,623$631,134,72444
ReportedDSCRLoanBalanceEst.PrepaymentEst.LossLoans
Deal Target Bond State Property
Type
Current Trust
Balance
MT 2006-C28 A2 CA Retail $190,000,000 $153,000,000 2/3/2011 ($37,000,000)
CC 2005-CB13 A2FL Various Office $180,900,000 $112,640,000 n/a ($68,260,000)
S 2006-GG8 A2 Various Retail $90,009,189 $65,650,000 n/a ($24,359,189)
MT 2007-C6 A1 CA Retail $84,565,377 $42,700,000 10/17/2011 ($41,865,377)
M 2005-3 A2 Various Office $70,000,000 $37,825,000 8/19/2011 ($32,175,000)
CC 2002-CIB4 A3 TX Retail $61,104,416 $128,000,000 6/1/2001 n/a
FC 2005-GG5 A2 CA Hotel $53,783,787 $50,400,000 12/16/2010 ($3,383,787)
M 2006-4 A3A GA Office $51,303,123 $42,000,000 5/20/2011 ($9,303,123)
MT 2007-WHL8 A1 Various Hotel $51,000,000 $110,000,000 9/27/2010 n/a
S 2006-GG8 A2 GA Office $50,500,000 $27,050,000 6/1/2011 ($23,450,000)
WBCMT 2006-C28 $318,034,342 1
JPMCC 2005-CB13 $180,900,000 2
GSMS 2006-GG8 $179,805,189 3
CWCI 2006-C1 $110,753,000 4
GCCFC 2005-GG5 $107,753,000 5
BACM 2005-3 $96,500,000 6
CSFB 2001-CKN5 $89,930,399 7
CGCMT 2007-C6 $87,702,073 8
BACM 2006-4 $74,127,123 9
GSMS 2005-GG4 $71,022,826 10
Deal Name REO Loan
Balance
Ranking
ng
Deal Target Bond State Property
Type
Current Trust
Balance
BACM 2006-5 A2 Various Hotel $127,777,001 $113,120,000 1/13/11 ($14,657,001)
JPMCC 2005-CB13 A2FL FL Hotel $107,030,785 $91,500,000 12/14/10 ($15,530,785)
JPMCC 2004-CBX A5 NJ Office $88,000,000 $50,300,000 12/20/10 ($37,700,000)
GMACC 2006-C1 A3 Various Retail $70,988,785 $397,650,000 7/1/05 n/a
CSMC 2007-C1 A1A TX Office $64,000,000 $35,000,000 3/24/10 ($29,000,000)
JPMCC 2005-CB13 A2FL PA Industrial $56,100,000 $46,850,000 n/a ($9,250,000)
BACM 2006-1 A2 CA Hotel $55,000,000 $85,100,000 1/19/11 n/a
CGCMT 2005-C3 A2 NJ Office $49,058,499 $32,200,000 3/1/11 ($16,858,499)
GCCFC 2005-GG3 A2 CA Office $45,371,159 $39,300,000 n/a ($6,071,159)
GSMS 2005-GG4 A2 PA Office $42,200,000 $40,000,000 4/7/11 ($2,200,000)
JPMCC 2005-CB13 $167,946,611
BACM 2006-5 $127,777,001
JPMCC 2004-CBX $88,000,000
GSMS 2005-GG4 $83,125,000
GMACC 2006-C1 $70,988,785
GCCFC 2005-GG3 $67,727,758
CSMC 2007-C1 $64,000,000
LBFRC 2006-LLFA $57,361,673
BACM 2006-1 $55,000,000
BACM 2005-3 $50,923,880
Balance
Table 3:
CMBS deals with largest REO balance

– 7 –
3 Ariel Preferred Retail Portfolio GSMS 2006-GG8 A2 Various Retail $90,009,189 $65,650,000 n/a ($24,359,189)
4 Moreno Valley Mall CGCMT 2007-C6 A1 CA Retail $84,565,377 $42,700,000 10/17/2011 ($41,865,377)
5 FRI Portfolio BACM 2005-3 A2 Various Office $70,000,000 $37,825,000 8/19/2011 ($32,175,000)
6 Highland Mall JPMCC 2002-CIB4 A3 TX Retail $61,104,416 $128,000,000 6/1/2001 n/a
7 Windsor/RECP Hotel Portfolio GCCFC 2005-GG5 A2 CA Hotel $53,783,787 $50,400,000 12/16/2010 ($3,383,787)
8 55 Park Place BACM 2006-4 A3A GA Office $51,303,123 $42,000,000 5/20/2011 ($9,303,123)
9 Four Seasons Nevis WBCMT 2007-WHL8 A1 Various Hotel $51,000,000 $110,000,000 9/27/2010 n/a
10 Tower Place 200 GSMS 2006-GG8 A2 GA Office $50,500,000 $27,050,000 6/1/2011 ($23,450,000)
Type
Current Trust
Balance
1 Trinity Hotel Portfolio BACM 2006-5 A2 Various Hotel $127,777,001 $113,120,000 1/13/11 ($14,657,001)
2 The Shore Club JPMCC 2005-CB13 A2FL FL Hotel $107,030,785 $91,500,000 12/14/10 ($15,530,785)
3 Continental Plaza JPMCC 2004-CBX A5 NJ Office $88,000,000 $50,300,000 12/20/10 ($37,700,000)
4 DDR/Macquarie Mervyn’s Portfolio GMACC 2006-C1 A3 Various Retail $70,988,785 $397,650,000 7/1/05 n/a
5 717 North Harwood Street CSMC 2007-C1 A1A TX Office $64,000,000 $35,000,000 3/24/10 ($29,000,000)
6 Investcorp Porfolio JPMCC 2005-CB13 A2FL PA Industrial $56,100,000 $46,850,000 n/a ($9,250,000)
7 Fairmont Sonoma Mission Inn & Spa BACM 2006-1 A2 CA Hotel $55,000,000 $85,100,000 1/19/11 n/a
8 Novo Nordisk Headquarters CGCMT 2005-C3 A2 NJ Office $49,058,499 $32,200,000 3/1/11 ($16,858,499)
9 Birtcher/Charlesbank Office Portfolio GCCFC 2005-GG3 A2 CA Office $45,371,159 $39,300,000 n/a ($6,071,159)
10 Four Falls GSMS 2005-GG4 A2 PA Office $42,200,000 $40,000,000 4/7/11 ($2,200,000)
Table 6:
Largest loans in foreclosure and loss risk
an effort to estimate the ability of immediate
refinancing proceeds to payoff the existing
loan balances.6
If these estimated loan
proceeds are less than the loan balance,
then a loss to the CMBS trust is expected.
If the loan proceeds are greater than the
loan balance, then there would not be a
loss to trust. Moody’s stated method works
backwards from current NOI and uses the
lesser amount of proceeds resulting from
either a DSCR of 1.25 (1.50 for hotels) or an
LTV of 65% (75% for hotels) test.7
Under this
method, an office property with $5 million
in NOI would qualify for a $43.2 million
refinancing using the LTV approach (with $4
million in debt service).8
Applying Moody’s methodology to the
44 loans in WBCMT 2006-C23 with DSCRs
below 1.0 results in an estimated loss of
$631.1 million. This extreme loss would
wipe out all of the $524 million junior
tranches that provide credit support for
the deal, and the A-J tranche would take
a $107 million loss (Figure 7). In addition,
senior bonds would take in $116 million in
prepayments, further eroding the yield and
value of senior bonds.
While the Moody’s loan analysis seems
to err on conservative side by applying
Figure 6:
Visualization of WBCMT 2006-C23 tranches
as of September 2011
Senior tranches (first pay) are at the bottom, junior tranches
(first loss) are at the top.
Figure 7:
WBCMT 2006-C23 junior tranches
as of September 2011
Tranches N through S with a total balance of $75 million would be
wiped out if the REO and delinquent loans took the $94.6 million
losses explained herein. Tranche M would lose 93% of its value.
6 Published by Moody’s in US CMBS and CRE CDO
Surveillance Review Q2 2010 (August 19, 2010).
7 Moody’s uses an interest-only loan originated at a 9.25%
interest rate, while the LTV approach uses an 8.0% cap
rate. DSCR Proceeds = (NOI/DSCR)/9.25%. LTV
Proceeds = (NOI/8.0%) * LTV.
8 The proceeds of $43,243,243 obtained by the DSCR
method are less than $46,875,00 obtained using a 8.0%
cap rate and 75% LTV.

– 8 –
Bibliography
“CTSLink,” CTSLink. N.p., n.d. Web. http://www.ctslink.com.
“Find a Securitization,” CMBS.com - Providing Standardized Tools for the CMBS Industry.
N.p., n.d. Web. http://www.cmbs.com/searchresults.aspx?showall=1.
Jacob, David P., Manzi, James M. and Fabozzi, Frank J., Handbook of Mortgage Backed
Securities, Chapter 50, “The Impact of Structuring on CMBS Bond Class Performance.”
“Moinian misses payments on 1775 B’way .” Crain’s New York Business, June 2, 2010:
http://www.crainsnewyork.com/article/20100602/REAL_ESTATE/100609962.
“Moinian misses payment on third property .” Crain’s New York Business, November 11,
2009: http://www.crainsnewyork.com/article/20091113/FREE/911139985.
“Securitization,” CMBS.com - Providing Standardized Tools for the CMBS Industry. N.p.,
n.d. Web. http://www.cmbs.com/securitization.aspx?dealsecuritizationid=1399.
“Tussle over 1775 Broadway goes down to wire .” Crain’s New York Business, December 6,
2010: http://www.crainsnewyork.com/article/20101206/REAL_ESTATE/101209910.
“US CMBS and CRE CDO Surveillance Review Q2 2010,” Moody’s, August 19, 2010.
Baruch College, CUNY
137 East 22nd Street
Box C-0120
New York, NY 10010
Tel: 646.660.6950 • Fax: 646.660.6951
Mitchel B. Wallerstein, President, Baruch College
William Newman, Founding Chair
Richard Pergolis, Co-Chair
Jack S. Nyman, Director
Emily Grace, Associate Director of Research
This research report is published by the Steven L.
Newman Real Estate Institute, Baruch College,
CUNY.
The Newman Real Estate Institute gratefully
acknowledges the support of the sponsors who
make possible our efforts to promote critical
thinking on topical issues for the real estate industry.
The views expressed in the research report are those
of the authors and not necessarily those of Baruch
College, City University of New York, or any of its
affiliated organizations, foundations, and sponsors.
Please address inquiries to Jack S. Nyman, Director, at:
a high interest rate, the derived loan
amount is based on an interest-only loan.
An amortizing loan with the same interest
rate would result in substantially lower
funds available to borrowers. However,
multifamily properties able to obtain
terms competitive with Fannie Mae or
Freddie Mac financing can obtain greater
loan proceeds than Moody’s estimates.
For example, on a loan with multifamily
collateral at 6.5% interest rate and a 25-year
amortization period, loan proceeds would
be 14% greater than Moody’s estimates.
Furthermore, these broad brushstrokes do
not provide a nuanced appraisal specific to
the property.
The loans with DSCRs under 1.0 are
severely troubled, and they very well may
be the next crop of bad loans that the
special servicer will be forced to workout.
To gain a better understanding of possible
outcomes, further analysis of the 44 loans
could include special servicer reports, the
opinions of local brokers and local market
data to assess property conditions. A more
precise outcome could then be estimated
and the prepayment expectations could be
entered into pricing models to understand
the impact on junior and senior CMBS
tranches.
The data shows that special servicers have
been less aggressive in addressing distress
than non-CMBS lenders. According to Real
Capital Analytics (RCA), CMBS distress
increased $7.7 billion through September
2011. In comparison, non-CMBS lenders
have reduced their distress balances by
about the same amount. “The comparison
also highlights the significant differences
between CMBS and non-CMBS lenders
in dealing with roughly the same amount
of distressed commercial property,” RCA
said in a press release. According to RCA,
“Non-CMBS lenders have been more
aggressive at working out problem loans
and have relied far less on modifications or
extensions, which risk becoming problem
loans again.” As a result of the aggressive
workouts, “Non-CMBS lenders also carry
much higher REO balances compared to
CMBS,” the RCA statement concluded.
Conclusion
This article provides a real market example
of how a distressed commercial mortgage
resulted in a significant prepayment to
senior CMBS investors. It also demonstrates
how to analyze CMBS loan data using both
special servicer reports and ratings agency
methodologies to understand the impact
on CMBS tranches.
The techniques described in this white
paper can be applied in numerous insightful
and profitable ways. Investors can compare
different CMBS issuances and tranches
to determine which offer the best value
for purchases on the secondary market.
In addition, current owners of CMBS can
perform a thorough credit analysis on
their portfolios to make hold as well as sell
decisions.■
0to.24$34,588,791$543,958$34,864,2217
.25to.49$27,554,229$3,584,132$23,970,0973
.50to.74$279,996,485$32,947,218$247,049,2679
.75to.99$404,115,453$78,864,315$325,251,13825
Total$746,254,958$115,939,623$631,134,72444
ReportedDSCRLoanBalanceEst.PrepaymentEst.LossLoansCurrent Trust
Balance
$190,000,000 $153,000,000 2/3/2011 ($37,000,000)
$180,900,000 $112,640,000 n/a ($68,260,000)
$90,009,189 $65,650,000 n/a ($24,359,189)
$84,565,377 $42,700,000 10/17/2011 ($41,865,377)
$70,000,000 $37,825,000 8/19/2011 ($32,175,000)
$61,104,416 $128,000,000 6/1/2001 n/a
$53,783,787 $50,400,000 12/16/2010 ($3,383,787)
$51,303,123 $42,000,000 5/20/2011 ($9,303,123)
$51,000,000 $110,000,000 9/27/2010 n/a
$50,500,000 $27,050,000 6/1/2011 ($23,450,000)
ng
rty Current Trust
Balance
$127,777,001 $113,120,000 1/13/11 ($14,657,001)
$107,030,785 $91,500,000 12/14/10 ($15,530,785)
$88,000,000 $50,300,000 12/20/10 ($37,700,000)
$70,988,785 $397,650,000 7/1/05 n/a
$64,000,000 $35,000,000 3/24/10 ($29,000,000)
al $56,100,000 $46,850,000 n/a ($9,250,000)
$55,000,000 $85,100,000 1/19/11 n/a
$49,058,499 $32,200,000 3/1/11 ($16,858,499)
$45,371,159 $39,300,000 n/a ($6,071,159)
$42,200,000 $40,000,000 4/7/11 ($2,200,000)
JPMCC 2005-CB13 $167,946,611
BACM 2006-5 $127,777,001
JPMCC 2004-CBX $88,000,000
GSMS 2005-GG4 $83,125,000
GMACC 2006-C1 $70,988,785
GCCFC 2005-GG3 $67,727,758
CSMC 2007-C1 $64,000,000
LBFRC 2006-LLFA $57,361,673
BACM 2006-1 $55,000,000
BACM 2005-3 $50,923,880
Balance
Table 7:
CMBS deals with largest foreclosure
loan balances

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