Goldman Sachs is securitizing a $349.75 million loan secured by a portfolio of rent-controlled apartment buildings in one of the most expensive cities in the U.S. – San Francisco.

Unlike some other rent-controlled markets, such as New York City, San Francisco ordinances only protect original tenants, according to Fitch Ratings, which is rating the deal. In other words, there are no “succession rights.” Once a unit turns over, it can then be rented at the prevailing market rents for that unit.

GS Mortgage Securities Corporation Trust 2016-RENT is backed by 61 multifamily properties with a total of 1,726 rent controlled units acquired between 2011 and 2012 by Veritas Investors, a joint venture between Veritas Investments, which is controlled by Yat-Pang Au, a real estate investor and former technology executive; and affiliates of Baupost Group, a hedge fund manager founded by Seth Klarman.

Approximately 89% of the units are rented at below-market rates, which in San Francisco average $2,556 a month, according to research firm Reis. They are concentrated in several central neighborhoods: Nob Hill; Mission; Pacific Heights; Downtown San Francisco; Russian Hill; and the Marina District. Supply is tight, which means rents should continue rising. Reis is forecasting annualized asking rent growth of 4.7%.

Fitch reckons that, if all of the units were leased at market levels, total rent collected on the portfolio would increase by $20 million a year.

The portfolio is highly leveraged, however. It secures a $480 million whole loan with a split loan structure: a $100 million A-1 note and a $249.75 million B note are part of the securitization trust. There is also a $65.125 million A-2 note and a $65.125 million A-3 note that are not part of this trust but are expected to be contributed to a future securitization.

The whole loan pays only interest, and no principal, for its entire five-year term.

There is also $196.5 million of junior mezzanine debt secured by pledges of the equity ownership interests in the mortgage borrower. The mezzanine loans mature on February 2021.

Fitch puts the “stressed” debt service coverage ratio and loan-to-value ratio for the trust component and the companion loans at 0.84x and 103.6%, respectively.

Proceeds from the loans were used to refinance $523.2 million of existing debt, fund a $19 million renovation capex reserve and $2.35 million of other reserves, pay $7.28 million of closing costs, and return $124.6 million of equity to Veritas.

Fitch expects to assign an ‘AAA’ rating to the senior tranche of notes to be issued by the securitization trust; these notes benefits from credit enhancement of 52%. 

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