Bank of America Merrill Lynch and  Deutsche Bank Securities are readying $440 million of commercial mortgages bonds backed by a loan that is secured by Independence Plaza in New York City, according to Morningstar.

The deal is dubbed dubbed BAMLL 2014-IP

The loan, which was funded on June 7, 2013, has a five-year term. It is interest-only throughout the term and bears interest of 2.7225%.

Independence Plaza, developed in 1975 under the Mitchell–Lama Housing Program —which provides affordable rantal housing to moderate and middle income families — is a 1,328 multifamily property that includes rent subsidized, Section 8 apartments.  Almost 60% of the units are rent controlled.

However the sponsors (Bank of America and German American Capital) had the property’s rent regulated status overturned in court and on April 15, 2014 received a 24.8% increase in Section 8 rents, according to the presale report.  Morningstar reported that rents at the property are expected to “grow significantly as they are reset to market levels.”

“There is potentially substantial upside in the property cash flow over the loan term and beyond, which is tied largely to the attrition of rent subsidized units,” said Morningstar analysts in the presale report.

The units do require a change in tenancy before the sponsor is able to move rental rates to market levels. "Attrition rates for these units have been somewhat sluggish over the last year and may prolong the timeframe required for the sponsor to realize any significant revenue gains," according to Morningstar. 

The property’s unit mix consists primarily of studio apartments, one- and two-bedroom units. Approximately 40% of the property’s units have been renovated and are leased at market levels. It also includes 43,054 square feet of fully occupied grade-level retail space, an 18,600 square foot elementary school, a 10,074 square foot swimming pool facility and a 230,000 square foot parking garage containing 550 parking spaces.

Morningstar has assigned preliminary ratings of ‘AAA’ to the class A notes; ‘AA’ ratings to the class B notes, ‘A+’ ratings to the class C notes;  ‘A+’ ratings to the class D notes and ‘BBB-‘ ratings to the class E notes.

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