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Another 'transitional' CRE lender readies debut CRE-CLO

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Varde VMC Lender, an investment firm that specializes in working out troubled commercial mortgages, has been branching out to financing offices and apartment buildings being upgraded or converted to a new use.

It joins a growing list of so-called transitional lenders tapping the commercial mortgage bond market to fund lending that was once kept on balance sheet. The sponsor’s first transaction, a $368 million commercial real estate collateralized loan obligation (CRE-CLO), launched this week, according to rating agency presale reports.

Initially, VMC 2018-FL1 will be collateralized by 24 loans as well as cash that will be used to acquire a 25th loan within 90 days of the closing of the transaction. Like many other CRE-CLOs, the deal also permits the acquisition of companion loan participations backed by the same collateral as loans held in the trust within two years of closing.

The reasons the properties being financed are in transition vary; some have “negative physical attributes,” others have lost key tenants, and some are simply being repurposed; Kroll Bond Rating Agency has identified five (20% of the collateral) that served as collateral in previous commercial mortgage securitizations, four of which (17.6%) were associated with a principal loss. The owners of all of these properties plan to upgrade them to attract new tenants, retain old ones, or attain higher rents.

One loan, Lathrop Industrial, is secured by a Class B industrial complex 73 miles east of San Francisco that is 100% vacant and requires additional renovation to make the tenant spaces ready for lease-up. The owner plans to invest $1.2 million ($3 per square foot) on capital improvements and the loan is structured with future funding of $4.4 million for capital expenditures. The loan is the sixth largest, at 4.6% of the portfolio.

Kroll considers the collateral to be highly leveraged; it puts the weighted average loan-to-value ratio at 128.3%, based on the loans held in the trust. That’s higher than any of the eight prior CRE-CLO transactions it rated in 2017, where the average in-trust KLTV was 118%, and ranged from 112% to 122.2%.

Taking into account debt held outside the trust, the properties are even more highly leveraged. Twenty loans (88.9% of the portfolio balance) have an unfunded companion participation held outside of the trust which may be funded upon satisfaction of the conditions set forth in the related loan documents. The aggregate amount of unfunded future advance obligations is $57 million.

Varde, and not the securitization trust, has the sole obligation to fund the future advances
However, none of the properties being financed have additional subordinate debt, with the exception of the Deacon Rental Properties, the eighth largest, at 4.4% of the pool, which is anticipated to issue up to $3.5 million in preferred equity. In addition, Rim Country Mall, the smallest loan (0.9%) permits incurrence of secured subordinate financing in the future.

Lastly, certain loans, including Lathrop Industrial and Oakland Airport Plaza, permit Property Assessed Clean Energy loans.

Varde is the Minneapolis affiliate of the global investment manager Värde Partners. The company has invested over $7 billion in performing, subperforming and nonperforming U.S. commercial real estate, and its affiliate Varde Mortgage Capital has originated or acquired over $1 billion in commercial real estate loans since in 2014.

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CMBS CRE Kroll Bond Rating Agency