CMBS refi of Rosslyn office portfolio requires equity injection

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The office market in Arlington, Virginia has taken a big hit from cutbacks at the Department of Defense, but Goldman Sachs and the Blackstone Group are making a sizable bet on a comeback.

In order to refinance a portfolio of seven office properties in the submarket of Rosslyn, just across the Potomac River from Washington, D.C., they had to obtain $142.1 million of mezzanine debt and kick in 16.4 million of additional equity, according to DBRS, which is rating mortgage bonds backed by the new, $500 million first mortgage.

Proceeds were used to refinance $635.2 million of debt, including an existing CMBS loan taken out in 2007 on three of the buildings, mezzanine debt and another mortgage held on balance sheet by the lender, fund an upfront reserve and closing costs, according to DBRS.

Budget cuts at the Department of Defense, as well as federal budget sequestration over the past several years have greatly affected the Rosslyn office submarket; vacancies averaged 25% over the past five years. Vacancies in the portfolio being securitized in Rosslyn Portfolio Trust 2017-ROSS reached a high of 33.7% in 2015.

Nevertheless, the borrowers, a joint venture between an investment fund controlled by Goldman Sachs and Monday Properties, one of the largest landlords in Rosslyn, have invested a total of $503.8 million of cash equity in the portfolio. Monday Properties has managed the portfolio since 2005 and acquired the assets in 2007; Goldman acquired an equity interest through its US Real Estate Opportunities Fund in 2011.

In order to attract boost occupancy and stabilze the portfolio, the sponsors have budgeted $118.3 million in capital expenditures and leasing costs over the next three years.

Goldman wears several different hats in this transaction.

The new first mortgage has term of 37-months but can be extended by 12 months up to three times, for a total of 73 months. It pays only interest, (one-month LIBOR plus 2.20% per annum) , and no principal, for its entire term. The loan was jointly underwritten by Goldman Sachs ($ 400 million) and Magma Finco, a unit of Blackstone Mortgage Trust ($100 million).
Blackstone Mortgage Trust is also the mezzanine lender, through its affiliate Husky Finco.

And Goldman is the initial purchaser of the bonds that will be backed by the mortgage, but it’s not keeping any skin in the deal (at least not in its role as lender and underwriter); instead, Magma Finco will hold on to the most subordinate tranche of securities to be issued in the deal in order to comply with risk retention rules.

DBRS expects to assign an AAA to the senior, $230 million tranche of notes to be issued, which benefits from 53.8% subordination.

In its presale report, DBRS notes that the buildings in the portfolio “are considered to be some of the best in the market and offer unobstructed views of national monuments and landmarks.”

Still, the rating acknowledges that there is a risk the sponsors will not be able to stabilize the property, which could result in a default or difficulty in refinancing. It also views the fact that the guarantor of the loan is an affiliate of the loan originator as a conflict of interest.
Cushman & Wakefield thinks the portfolio could be worth $1.27 billion, assuming it is “stabilized”; DBRS thinks this is a bit optimistic. The rating agency’s

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