JP Morgan is securitizing a portion of a $557 million loan backed by a portfolio of 103 office buildings and “flex” properties, which have multiple uses, such as office space, manufacturing and warehouse distribution.

Workspace Property Trust, a real estate investment trust founded last year by former Mack-Cali Realty executives, used the loan to help finance the acquisition of the property from another REIT, Liberty Property Trust. The remainder of the $969 million purchase price was funded with $259 million of mezzanine debt, $99 million of preferred equity, and $109.0 million of cash.

The first-lien mortgage serves as collateral for a deal dubbed JPMCC 2016-WPT. It has an initial two-year term with three, one-year extension options, for a total possible term of five years. It pays only interest, at a spread 336 basis points over one-month Libor, and no principal for the entire term. In other word, it does not amortize, increasing the risk that it could prove difficult to refinance when the final, balloon payment comes due.

KBRA, which is rating the deal, considers the loan to be moderately levered.  It calculates the loan-to-value ratio at 79.1%.  (This is based on the firm’s own valuation for properties in the portfolio, which is roughly one third lower than their current appraised values.) However, after taking into account the $259 million of mezzanine debt held outside the trust, the all-in LTV is 115.8%. “Should a default occur, the presence of additional debt could introduce additional creditors that could attempt to exercise remedies that are adverse to the trust, or support a bankruptcy plan that is adverse to the trust’s interests,” the presale report states. Throw in the preferred equity, which has debt-like characteristics, and the LTV rises even further, to 129.9%.

Unlike many other securitizations of single commercial mortgages, which are geographically concentrated, the properties ultimately backing this deal are located in 16 different submarkets across four states, including Florida (40.6%), Pennsylvania (25.5%), Arizona (17.4%), and Minnesota (16.5%). The properties are leased to approximately 379 tenants with a weighted average lease term of 10.9 years, with only three tenants that account for more than 3% of total base rent: Aetna Life Insurance (5.1% of total base rent), Siemens Medical Solutions (3.8%), and United HealthCare Services (3.8%).

Also of note, according to KBRA, is that fact that, under the terms of the loan agreement, with the lender’s consent, the borrower is permitted to incur Property-Assessed Clean Energy loans or any other debt incurred for improvements to any property for the purpose of increasing energy efficiency, increasing use of renewable energy sources or resource conservation and repaid through multi-year assessments against such property. However, failure to timely pay such assessments can give rise to a lien against the related mortgaged property.

Eight classes of certificates will be issued, five of which are entitled to principal and interest, two of which are entitled to interest only, and one of which is a residual class. KBRA expects to assign an AAA to the senior tranche.

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