This month ReadyCap Commercial completed its first securitization of small balance commercial mortgage loans; and Colony Financial began marketing $220 million of senior securities backed by the asset class.

ReadyCap Commercial Mortgage Trust 2014-1 sold $182 million of ‘Aaa’/ ‘AAA’ securities, backed by 71 fixed- and floating-rate, newly originated first lien loans secured by 75 commercial and multifamily properties, according to a company press release. Moody’s Investors Service and DBRS rated the deal.  

KeyBank National Association is the master servicer and special servicer. Deutsche Bank Securities and J.P. Morgan Securities served as placement agents.

The small balance loans securitized in ReadyCap’s deal have an average balance of $2.6 million, significantly lower than the average loan balance for CMBS 2.0 deals of approximately $18.1 million.

ReadyCap is a unit of Sutherland Asset Management, a real estate investment trust managed by Waterfall. The company has been in business for slightly longer than a year. It originates small balance commercial and multifamily loans with balances generally between $1 million and $10 million. In its first year, ReadyCap funded about $125 million.   

“We are pleased to issue our first securitization, demonstrating our continued commitment to the small balance commercial real estate sector,” said ReadyCap CEO Jim Going in a press release. “The small balance commercial market continues to be fragmented for investors and owners of small balance commercial real estate and these customers need a flexible, common-sense approach to financing.”

An increase in demand from borrowers for small-balance floating-rate loans has led to the creation of several programs this year. In the first half of 2014, issuance of small balance commercial loans reached a total of $1.8 billion, surpassing last year’s total of $1.5 billion, according to data provided by the firm. Advisory and struturing firm R3 Funding projects up to a 300% increase in that volume by year-end, according to a Mortgage Observer report.

Earlier this month R3 Funding arranged a two-year interest-only CMBS loan for The Strathallan Doubletree by Hilton Hotel at 550 East Avenue, an upscale, 155-key all-suite hotel in Rochester NY's arts and museum district. 

The loan was the first arranged through the Cantor Commercial Real Estate (CCRE) small-balance floating-rate program, created earlier this year. 

Up next in this asset class is Colony Financial's $220 million sale of senior note securities, rated a preliminary ‘AAA’ by Moody’s. The notes are structured with credit enhancement at 31.25% compared to the 28.75% charged for the triple-A’s on the ReadyCap deal.

Compared to the ReadyCap deal, Colony’s portfolio is more diverse with 301 fixed and floating rate loans secured by 307 properties. The loans are secured by multifamily, manufactured housing, and mixed-use (multifamily with ground floor retail) properties.

Approximately 265 loans in the pool, representing 69.8% of the transaction's balance, had an original loan balance that was less than or equal to $2.0 million. Approximately 35 loans, representing 28.4% of the pool balance, had an original loan balance that was between $2.0 million and $5.0 million. Only one loan, representing 1.8% of the pool balance, had an original loan balance of $6.4 million.

All of the loans were acquired through multiple bulk purchases; approximately 73.8% of the pool balance was acquired from Fannie Mae.

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