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Brookfield returns to CMBS to refinance portfolio of life science buildings

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Brookfield Asset Management is tapping the securitization market again to refinance assets it acquired through its $11.4 billion purchase of Forest City Realty Trust in December 2018. This this time, it has obtained a $1.11 billion mortgage on eight life science office and laboratory buildings in Cambridge, Mass., from four banks: Citigroup, Barclays, Bank of America and Deutsche Bank.

The properties, with some 1.3 million square feet in total, were initially developed by Forest City as a part of the 2.3-million-square foot University Park project. Brookfield, as sponsor, will be contributing approximately $432 million to the acquisition of the portfolio.

The mortgage has an initial term of two years and can be extended for one year up to five times and pays only interest, and no principal, for its entire term. It is being used as collateral for a $765 million offering of bonds in a transaction called CAMB Commercial Mortgage Trust 2019- LIFE.

Morningstar Credit Ratings values the portfolio of buildings at $1.25 billion, based on its own measurement of net cash flow and a capitalization rate of 7.10%. This results in a loan-to-value ratio of 93.4% on the trust notes and 103.7% when factoring in the mezzanine loan.

Moody’s Investors Service puts the LTV at 116%, which it considers to be “high.”

Both Morningstar and Moody’s cite the location of the buildings and their market as a strength of the deal. All eight properties are located on the campus of the Massachusetts Institute of Technology within the Cambridge submarket, both of which have limited available land for development and high barriers to entry.

As of Nov. 30 2018, the portfolio was approximately 99% leased to 15 unique tenants and seven were 100% occupied. The portfolio has a weighted average remaining lease term (based on in-place base rent) of approximately 8.7 years, which is 1.7 years beyond the fully extended mortgage loan term of seven years. Leases representing approximately 34.2% of the in-place base rent expires during the fully extended mortgage loan term, with no more than approximately 12.8% expiring in any single year during the fully extended mortgage loan term.

In addition, the portfolio has benefited from significant capital investment with tenant improvements alone totaling approximately $76.8 million since late 2017. “Site inspections confirm that the properties are equipped to meet the demands of life science tenants and designed to help attract and retain the industry’s top talent,” Moody’s reports.

However, each of the properties operate subject to long-term ground leases with MIT. In addition to base rent, each lessee is required to pay percentage rent at an annual rate equal to 15% of annual gross revenues.

The loan is structured with upfront reserves of $60.6 million related to outstanding unfunded tenant improvements, landlord work and leasing commissions.

Another negative: Morningstar considers the property release provisions to be weak compared to those of other single-borrower, multi-property deals. The mortgage stipulates a 105% release premium for first 25% of the original loan amount and 110% release premium thereafter.

Both Moody’s and Morningstar expect to assign triple-A ratings to the senior tranche of notes to be issued in the transaction.

Brookfield was in the CMBS market earlier this month to refinance a portion of the New York Times Building, another asset it acquired in its purchase of Forest City.

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CMBS Brookfield Property Partners