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Owners of San Francisco office tower tap CMBS for cashout refi

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The owners of a 48-story office building in San Francisco are tapping the commercial mortgage bond market for a cash out refinancing. The $755 million deal is another sign that the CMBS market has regained its footing after stumbling amid the general disruption in the financial markets late last year.

The new loan takes out a $505 million mortgage on 101 California Street that was originated by Metropolitan Life Insurance Co. and New York Life Insurance Co. and held by the two insurers on their balance sheets, according to rating agency presale reports.

The owners are Hines Interests, Singaporean sovereign wealth fund GIC, and the government of another Asian country that has kept its ownership anonymous. The property was built by Hines in 1982 and occupies a full city block in San Francisco’s central business district. It has approximately 1.3 million square feet of office space and 23,280 square feet of retail space.

A trophy asset of this size is typically financed in either the commercial mortgage bond market or by one or more insurance companies. In this case, the mortgage, which pays a fixed rate of interest of 4.1815%, and no principal, for its entire 10-year term, is split into six separate notes that will be used as collateral for multiple transactions. There are four senior A notes and two subordinate B notes. Initially, two of the senior A notes the two subordinate B notes are being bundled into collateral for a transaction called CALI 2019-101C.

The remaining two pari passu A notes totaling $240 million are expected to be contributed to future CMBS transactions.

Proceeds were used to retire existing debt of $496.4 million, pay prepayment and closing costs of $15.8 million, fund over $20 million of reserves, and return approximately $221.6 million of equity to the sponsors.

Kroll Bond Rating Agency puts the loan to value ratio of the debt held in the securitization trust at 88.7%, based on its estimate of “sustainable net cash flow and value,” and a valuation that is 42% lower than the property’s appraised value. That is above the average “KLTV” of 75.7% for the 28 single borrower office transactions it has rated to date.

But Kroll also assigned the property an “above average” property score of 4.25 owing to the quality of the interior and exterior finishes, panoramic views and excellent location.

The building also has strong historical occupancy. It was 91.5% leased as of December 2018 and has maintained an annual average occupancy of 91.8% for the 33-year period from 1985 to 2018.

The five largest current tenants, with a collective 35% of total square footage, are either financial institutions or large law firms, and include Merrill Lynch, Cooley LLP, Morgan Stanley, Deutsche Bank and Winston & Strawn.

However, nearly all of the tenants (98.4% of base rent) roll during the 10-year loan term. Additionally, the second-largest tenant, Cooley LP (8% of base rent), has indicated that it will vacate its space at the end of its lease in 2020. Of the 10 largest tenants, two (14.4% of base rent), Merrill Lynch (8.7%) and Morgan Stanley (5.7%), have a lease that contains a one-time termination option.

Kroll expects to assign an AAA to the senior tranche of notes to be issued in the transaction.

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CMBS Refinance