Presale:
J.P. Morgan Chase Commercial
Mortgage Securities Trust 2014-DSTY
Primary Credit Analyst:
Richard Reilly, New York (1) 212-438-4674; [email protected]
Secondary Contacts:
James C Digney, New York (1) 212-438-1832; [email protected]
Kurt C Pollem, CFA, New York (1) 212-438-1852; [email protected]
Table Of Contents
$430.0 Million Commercial Mortgage Pass-Through Certificates Series
2014-DSTY
Rationale
Transaction Overview
Strengths
Risk Considerations
Collateral Characteristics
Loan Characteristics
Property Descriptions
Destiny USA Phase I (Carousel Center)
Destiny USA Phase II
Market Summary
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Table Of Contents (cont.)
Property Evaluation Details
Scenario Analysis
Transaction-Level Credit Enhancement
Standard & Poor's 17g-7 Disclosure Report
Related Criteria And Research
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Presale:
J.P. Morgan Chase Commercial Mortgage
Securities Trust 2014-DSTY
$430.0 Million Commercial Mortgage Pass-Through Certificates Series
2014-DSTY
This presale report is based on information as of July 17, 2014. The ratings shown are preliminary. This report does not constitute a
recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the
preliminary ratings.
Preliminary Ratings As Of July 17, 2014
LTV (%)
Market value decline
(%)(iii)
215.0
45.0
(69.7)
15.0
215.0(ii)
N/A
N/A
N/A
N/A
N/A
N/A
55.0
(63.0)
12.3
35.8
62.5
(57.9)
10.8
NR
96.6
82.7
N/A
N/A
NR
34.8
90.0
N/A
N/A
Class
Preliminary rating(i)
Preliminary amount (mil. $)
A
AAA (sf)
X-A
AAA (sf)
X-B
AA- (sf)
47.8(ii)
B
AA- (sf)
47.8
C
A- (sf)
D
E
Debt yield (%)
(i)The rating on each class of securities is preliminary and subject to change at any time. The certificates will be issued to qualified institutional
buyers according to Rule 144A of the Securities Act of 1933. (ii)Notional balance. (iii)Reflects the decline in the combined appraised value of $710
million (as of May 2014) that would be necessary for the transaction to experience a principal loss at each given rating level. LTV--Loan-to-value
ratio, as calculated by Standard & Poor's. NR--Not rated. N/A--Not applicable.
Profile
Expected closing
date
July 31, 2014.
Collateral
Two commercial mortgage loans totaling $430 million secured by two phases of Destiny USA: Phase I (first mortgage
balance: $300 million) and Phase II (first mortgage balance: $130 million).
Standard & Poor's
aggregate trust
asset LTV
90.0% (based on Standard & Poor's values).
Standard & Poor's
aggregate trust
asset DSC
1.94x (based on Standard & Poor's NCF and the debt service payable on the mortgage loans).
Payment structure
On each distribution date, interest accrued for each class of certificates at the applicable pass-through rate will be
distributed in the following priority, depending on available funds: first, pro rata, to the class A and X-A certificates, then pro
rata to the class B and X-B certificates, then to the class C, D, and E certificates, in each case until the interest payable to
each such class is paid in full.On each distribution date, principal payments on the mortgage loans will be distributed in the
following priority, depending on available funds and amounts received from principal payments: first to class A, then class
B, then class C, then class D, and then class E. The class X–A and X–B certificates will not be entitled to receive principal
distributions; however, the notional amount of the class X–A and X-B certificates will be reduced by the aggregate amount
of principal distributions and realized losses allocated to the class A and class B certificates respectively. Losses will be
allocated to each class of certificates in reverse alphabetical order starting with E through and including A, in each case
until the certificate balance of each class has been reduced to zero. The notional amount of either class X certificate will be
reduced by the aggregate amount of realized losses allocated to certificates that are components of the notional amount of
these certificates.
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Profile (cont.)
Depositor
J.P. Morgan Chase Commercial Mortgage Securities Corp.
Mortgage loan
seller
JPMorgan Chase Bank N.A.
Master servicer and
special servicer
Wells Fargo Bank N.A.
Trustee
Wilmington Trust N.A.
Certificate
administrator
Wells Fargo Bank N.A.
LTV--Loan-to-value ratio, which is based on Standard & Poor's values. DSC--Debt service coverage. NCF--Net cash flow.
Rationale
The preliminary ratings assigned to J.P. Morgan Chase Commercial Mortgage Securities Trust 2014-DSTY's $430.0
million commercial mortgage pass-through certificates reflect Standard & Poor's Ratings Services' view of the
collateral's historical and projected performance, the sponsor's and manager's experience, the trustee-provided
liquidity, the loans' terms, and the transaction's structure. We determined that the loans have a beginning and ending
loan-to-value (LTV) of 90.0%, based on our estimate for the long-term sustainable value of the properties backing the
transaction. The loans will pay a 3.814% fixed interest rate.
Transaction Overview
An overview of the transaction's structure, cash flows, and other considerations follows (see chart 1).
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Strengths
The transaction has the following strengths:
• The collateral for the loans comprises two phases of the Destiny USA mall in Syracuse, N.Y. The property maintains
a strong market position within its primary trade area. Destiny USA is the sixth-largest enclosed shopping center in
the country and integrates traditional and outlet retailers, dining venues, and a breadth of entertainment options.
Moreover, the mall's trade area covers an area up to two and a half hours from the property and attracts shoppers
from upstate New York and southern Canada, according to the appraiser and discussions with management during
our site visit.
• The collateral's performance has improved in the past three years due in part to the economic recovery, which has
improved consumer confidence and increased spending. Net operating income for Phase I of the mall increased
16.7% since 2010 through the trailing-12 months (TTM) ending in March 2014. The mall's in-line sales per sq. ft.
have also increased by approximately 14.9% to $541 per sq. ft. from $491 per sq. ft. in 2010.
• Phase II of the mall is newly constructed, having been completed in early 2012, and is in good condition. The
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•
•
•
•
•
sponsor spent approximately $80.0 million in construction and tenant improvements and leasing costs (TI/LCs)
between 2012 and 2013. The expansion leased up relatively quickly and is currently 75.8% occupied, or 81.2%
including temporary tenants and leases out for signature. We did not include income from leases out for signature in
our income forecast. Future leasing represents potential upside for the property.
The mortgage loans contain anti-poaching provisions that prohibit each phase's tenants from relocating to the other
phase unless the debt service coverage (DSC) is still greater than 2.10x after relocating. However, tenants occupying
less than 15,000 sq. ft. may be relocated so long as the phase's occupancy excluding temporary tenants is still at
least 90% after the relocation and the total square footage that the relocated tenants occupied during the preceding
six months was less than 30,000 sq. ft.
The portfolio has a diverse tenant mix of national anchors (greater than 50,000 sq. ft.), major retailers (between
10,000 sq. ft. and 50,000 sq. ft.) and in-line retailers (less than 10,000 sq. ft.). The diversity of the retail income
lowers the risk of sudden drops in the loan's capacity to meet its debt service obligations.
The property was awarded Leadership in Energy and Environmental Design (LEED) gold certification by the U.S.
Green Building Council in February 2012, making it the largest LEED Gold certified retail building in the country.
We believe that this will help to attract and retain tenants and potentially help to reduce utility costs at the property.
The loans are structured with a hard lockbox with springing cash management. All excess cash flow is swept into a
lender-controlled reserve account if the DSC falls below 1.70x on the last day of the quarter. Currently, the trust
loan balance's DSC is 1.94x, calculated using Standard & Poor's net cash flow (NCF) for the properties, indicating
that the NCF could drop approximately 12.4% before it triggers the cash flow trap.
The transaction structure holds the borrowers responsible for expenses that would typically result in shortfalls to the
certificateholders, such as special servicing, work-out, and liquidation fees, as well as costs and expenses incurred
from the special servicer's appraisals and inspections. If deemed recoverable from the liquidation proceeds, the
servicer must make administrative advances (provided the collateral has sufficient value) to prevent interest
shortfalls that might otherwise arise from these expenses if the borrower does not pay them on time.
Risk Considerations
We considered the following risks for this transaction:
• The trust loan balance has high leverage, with a 90.0% weighted average LTV, based on Standard & Poor's
valuation, which is higher than most single-borrower transactions we have rated this year and was the primary
factor in our preliminary ratings on this transaction. However, the LTV based on the appraiser's valuation is 60.1%.
Our long-term sustainable value estimate is 32.8% lower than the appraiser's valuation.
• The mortgage loans are interest-only for the entire term. Compared with an amortizing loan, an interest-only loan
bears a higher refinance risk because of the relatively higher loan balance at maturity.
• The weighted average occupancy cost for the mall's Phase I tenants is 17.4% including Apple or 20.0% excluding
Apple, as calculated by Standard & Poor's. Average sales for these tenants at the mall are $423 per sq. ft. as of
March 2014 and have demonstrated consistent increases. Furthermore, the mall's recent expansion and new dining
and entertainment venues may continue to bolster and support increasing sales. According to the appraiser, the
mall's occupancy cost represents a sustainable figure in light of competing and similar malls. Standard & Poor's
forecasted NCF for Destiny Phase I is 27.5% below the reported 2013 NCF for the property and 27.4% below the
issuer's underwritten NCF.
• Phase II of the mall has a limited operating history and no reported sales or occupancy costs since its construction
in 2012. We accounted for this by forecasting potential gross income for this section of the mall in line with in-place
leases without the benefit of potential future stabilization. The Cushman & Wakefield appraisal predicts stabilization
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in 2016 resulting in an approximate 10% valuation increase.
• The transaction comprises two loans that are neither cross-collateralized nor cross-defaulted. The
payment-in-lieu-of-tax (PILOT) bond financing underlying Phase I of the mall restricts the loans from being crossed.
• The property is located in a tertiary market with low barriers to entry, so the construction of additional retail
competition is possible. However, the property is located within the Syracuse MSA, where the unemployment rate is
lower than the national average. Furthermore, the primary and secondary trade areas for the mall encompass an
area 75-100 miles from the property or up to a two and half hour drive from the property, according to the
appraiser.
• The loans' collateral has high exposure to J.C. Penney (J.C. Penney Co. Inc.; 'CCC+/Negative') and Sears (Sears
Holding Corp.; 'CCC+/Stable'). Store closures from corporate-level stress could negatively affect the loans'
collateral, potentially triggering lease terminations or rent relief from co-tenancy clauses. However, we also
considered the partial mitigation from the mall's trade area, competitive position, in-line retailer composition and
performance, and our view that the anchor spaces could likely be re-leased if they were vacated.
• The Bon-Ton anchor within the mall's Phase I is underperforming its chain-wide average for annual sales. For the
TTM ending March 2014, Bon-Ton reported $37 per sq. ft. in sales compared to a $130 per sq. ft. chain-wide
average. According to the manager, Bon-Ton has expressed interest in renewing its lease and expanding to a
higher-end retail concept. We accounted for these low sales in our vacancy forecast for the property.
• Out of the mall's total tenants, 89 tenants, which lease approximately 34% of total collateral sq. ft. and contribute
approximately 46% of total in-place base rent as calculated by Standard & Poor's, have termination options that are
contingent on maintaining certain occupancy, anchor co-tenancy, or sales benchmarks. The portfolio's performance
and historical occupancy are generally at levels above the thresholds that would trigger these termination options.
• The Phase I borrower is party to a PILOT agreement under which the borrower makes PILOT payments rather than
real estate tax payments and the Phase I mortgage loan is subordinate to the PILOT payments pursuant to an
intercreditor agreement. The Phase I lender has cure rights regarding the Phase I borrower's default under the
PILOT agreement. In addition, if the PILOT agreement is accelerated for any reason, the Phase I lender has the
right to enter into new documents on the same terms. The PILOT payment increases 4% each year through its
expiration in 2035. Tenants are generally required to reimburse PILOT payments, which may lead to increasing
occupancy costs. We directly accounted for the contractual PILOT payment increases by forecasting a
forward-looking PILOT payment in our analysis of Destiny USA Phase I, resulting in a Standard & Poor's NCF
27.5% below the borrower's reported 2013 NCF.
• The Phase I Environmental report for both Destiny USA mall phases revealed contamination at the mortgaged
properties related to historical concrete production and petroleum storage, with 17 documented hazardous material
spill cases that require no further action. The majority of existing contamination was investigated and remediated
via containment structures, relocating contaminated soil, and installing containment and capture systems for
contaminated ground water. The Destiny USA Phase II collateral property and a portion of the Destiny USA Phase I
property have not yet received regulatory closure and the borrowers are responsible for completing the
investigation and remediation. Remedial investigation work plans for these sites have been submitted to the New
York State Department of Environmental Control for approval. The operation, maintenance, and monitoring
program costs for the environmental conditions are reportedly less than $150,000 per year. The borrower has
obtained an environmental indemnity as part of the loans' closing.
• Affiliates of the Phase I borrower were involved in litigation related to historic industrial activities in and around the
lake adjacent to the subject property. A plan to remediate mercury, polychlorinated biphenyls (PCB), hydrocarbon,
and volatile organic compound (VOC) pollution in the lake is estimated to cost $451 million. Honeywell
International Inc. (Honeywell) was identified as the primary responsible party based on the company's historical
activities related to the lake. Honeywell brought a civil suit against ExxonMobil, alleging that historical incidents
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involving ExxonMobil additionally contributed to contamination. ExxonMobil brought suit against the borrower's
affiliates because they signed an environmental indemnity when purchasing the collateral land from ExxonMobil
before constructing the mall. Both the borrower and ExxonMobil had environmental insurance in place at the time,
covering $3 million per incident and $15 million aggregate. The plaintiff voluntarily discontinued litigation.
Collateral Characteristics
Collateral description
The pool contains two loans secured by first mortgage liens on the fee and leasehold interests in two contiguous
phases of the Destiny USA mall. The loans are neither cross-collateralized nor cross-defaulted with each other due to
restrictions under the PILOT bond financing. Phase I of the mall, with a $300 million loan amount (69.8% of the trust
balance), is a 1.5 million sq. ft. enclosed regional mall, of which 1.2 million sq. ft. serves as collateral. Phase II of the
mall, with a $130 million loan (30.2% of the trust balance), is a 875,000 sq. ft. enclosed regional mall that was
completed in 2012 and serves as collateral in its entirety.
Loan Characteristics
Loan type, origination date, term, and amortization
The loans pay interest at a 3.814% fixed rate and were originated in June 2014 with a 60-month term, maturing in
June 2019. The loans do not provide for scheduled amortization, and the entire original loan amount will have to be
repaid on the loans' maturity date. We made adjustments to our analysis to reflect the loans' interest-only nature,
according to our criteria.
Property releases
The borrowers may obtain the release of certain non-income producing parking outparcels at each phase of the mall,
subject to certain conditions detailed in the offering circular. Release conditions include but are not limited to there
being no event of default, the lender's reasonable satisfaction that the LTV based on the remaining collateral does not
exceed 125% or does not increase, that the released parcel is a legal tax lot, and that all necessary easements for the
subject property's operation are acquired.
Borrower/sponsor
The transaction's borrowers are bankruptcy-remote special-purpose entities affiliated with Pyramid Management
Group LLC (Pyramid), a privately held real estate developer and management company with a core focus on real
estate in the northeastern U.S. It is the largest privately owned shopping mall developer in the country and owns a
portfolio of 18 properties that generates more than $4.0 billion in annual sales. This portfolio includes seven
super-regional shopping centers greater than one million sq. ft., eight smaller regional shopping centers, and two
power centers. Pyramid manages each of the properties within the Pyramid portfolio, including three of New York
State's largest malls: Crossgates Mall in Albany, Palisades Center in West Nyack, and Destiny USA mall in Syracuse.
Beginning with the development of Palisades Center in 1998 and continuing through to the expansion of Destiny USA,
Pyramid has been pursuing a "ThEATery" concept which pairs movies and entertainment with dining. Pyramid has
incorporated this concept to its Walden Galleria property, adding upscale dining and retailers, and it was a driving
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force behind the new mix of entertainment and dining that is the backbone of the Destiny USA's Phase II development.
The organizational documents require that each borrower have one or more independent directors whose votes are
needed before either borrower may file for bankruptcy.
PILOT payments
On Dec. 31, 2005, the borrowers entered into a PILOT agreement with the City of Syracuse and its Syracuse Industrial
Development Agency (SIDA) to fund costs associated with the expansion of the mall. The PILOT stipulates that the
Phase I borrower will make PILOT payments rather than paying real estate taxes. As a provision of the PILOT
agreement, the underlying land was transferred to SIDA although Destiny USA Holdings LLC continues to own the
improvements. At the end of the PILOT agreement, the land will revert back to the borrowers. The Phase I mortgage
loan is subordinate to the PILOT payments pursuant to an intercreditor agreement. The PILOT payment increases 4%
each year through its 2035 expiration. The Phase I lender has cure rights if the Phase I borrower defaults under the
PILOT agreement, and if the agreement is accelerated for any reason, the Phase I lender also has the right to enter into
new documents on the same terms.
Management agreement
Pyramid Management Group LLC, a borrower-related entity, will manage the mortgaged properties. Any management
fees payable are subordinate to debt service payments in the cash management waterfall. The property manager is
entitled to a monthly management fee of 3.0% of gross revenues and certain other fees. The appraiser estimated the
management fees to be 3.0% of the effective gross income (EGI). In our analysis, we assumed a management fee of
5.0% of the EGI, excluding reimbursements. If the borrower hires a third-party manager (subject to a rating agency
confirmation), the loan documents cap the management fee at 3.0% of the gross income from operations.
The management agreement may not be terminated unless the borrower has entered into a replacement management
agreement approved by the lender, with a qualified manager also approved by the lender and subject to rating agency
confirmation.
Trade payables
The borrowers may accrue trade payables of up to 3.0% of each property's loan amount, and they must incur these
payables in the ordinary course of operations. The loan agreement requires that trade payables be repaid within 60
days of the due date.
Insurance
We reviewed the transaction's insurance provisions and providers and determined that they are generally consistent
with our property insurance criteria and normal market standards.
Reserves
A summary of the transaction's reserves is shown in table 1.
Table 1
Reserves
Tax and insurance
reserves
The borrower will make monthly deposits for taxes and insurance in the amount equal to 1/12 of the next succeeding
payments for taxes, PILOT payments, and insurance premiums due.
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Table 1
Reserves (cont.)
Capital
expenditure
reserves
The Phase I borrower will make a monthly deposit of $18,159 ($0.18 per sq. ft. of collateral) and the Phase II borrower will
make a monthly deposit of $10,928 ($0.15 per sq. ft. of collateral) for replacements and repairs.
TI/LC reserves
The Phase I and Phase II loans required upfront reserves of $820,110 and $3.3 million for outstanding TI/LC items,
respectively. The Phase I borrower will make a monthly deposit of $100,883 (approximately $0.98 per sq. ft. of collateral) and
the Phase II borrower will make a monthly deposit of $72,850 ($1.00 per sq. ft. of collateral) for TI/LC obligations. The
reserve for the Phase I loan is capped at $2.42 million so long as J.C. Penney, Macy's, and Lord & Taylor or successor
tenants occupy the property. The reserve for the Phase II loan is capped at $1.0 million so long as Dick's Sporting Goods and
Revolutions or successor tenants occupy the property.
Required repairs
reserves
The Phase I and Phase II loans required $1.3 million and $29,914 in upfront reserves, respectively, for deferred maintenance
items.
Free rent reserves
Phase I and Phase II loans required $2.5 million and $1.2 million in upfront reserves, respectively, for outstanding free rent at
the properties.
TI/LC--Tenant improvements/leasing commissions.
Cash management
Each loan has a hard lockbox in place for cash management that must be a separate clearing account held in the
borrower's name but controlled by and pledged to the lender. The borrowers or property managers must deliver to all
property tenants a written notice instructing that all lease rents must be delivered to the operating account. The
borrower is then required to deposit all other revenues from the properties into the operating account within three
business days.
Property Descriptions
Destiny USA is a 2.4 million-sq.-ft. super-regional mall comprising the 1.5 million-sq.-ft. original mall and the
875,000-sq.-ft. expansion completed in 2012. Each of the two loans is collateralized by its own respective phase of the
mall. The mall is the sixth-largest enclosed shopping center in the country. The property contains approximately 8,668
surface and garage parking spaces and covers 77.7 acres, 44.4 acres of which are included in the Phase I collateral and
33.3 acres are included in the Phase II collateral.
Destiny USA Phase I (Carousel Center)
Destiny USA Phase I, formerly known as Carousel Center, is a 1.5-million-sq.-ft. enclosed regional shopping mall
situated on 45 acres of land. Of the mall's total square footage, 1.2 million sq. ft. will serve as collateral for the Phase I
loan. The initial phase of the mall was built in 1990 and renovated in 2000 and 2012.
The property currently features two anchor stores, Lord & Taylor and Macy's, which are tenant-owned and not part of
the loans' collateral. Collateral anchors and junior anchors include J.C. Penney, Bon-Ton, Burlington Coat Factory,
Sports Authority, Forever 21, and Best Buy, which total 470,849 sq. ft. (38.0% of the collateral square footage). As of
the TTM ending March 2014, sales for Macy's and J.C. Penney exceeded the 2013 average for their respective chains,
despite lower per-sq.-ft. sales for J.C. Penney because its store is significantly larger than the average J.C. Penney store
size. However, Bon-Ton's sales were below the chain-wide average. Lord & Taylor is privately owned and does not
make its financial performance available to the public (see table 2).
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Table 2
Destiny USA Phase I Anchor Tenant Sales
Sq. ft.
TTM sales per
sq. ft. ($)
TTM total sales
(mil. $)
2013 chain-wide average sales
per sq. ft. ($)(i)
2013 chain-wide average total
sales (mil. $)(i)
Macy's(ii)
170,000
251(iii)
42.7(iii)
186
33.3
J.C. Penney
158,590
101(iii)
16.0(iii)
107
10.9
Lord &
Taylor(ii)
100,000
192
19.2
N/A
N/A
Bon-Ton
80,000
37
3.0
130
10.3
(i)Provided by the appraiser and issuer. (ii)Noncollateral tenant. (iii)Sales estimate provided by the leasing manager. TTM--Trailing 12 months
ending March 2014.
In addition to the anchor and junior anchor tenants, Destiny USA Phase I is improved with a Regal Cinema with 17
screens and $614,072 per screen in sales as of the TTM ending March 2014. There are five additional major
tenants--Against All Odds, DSW, Finish Line, H&M, and Old Navy--representing 8.5% of the collateral square footage.
These major tenants generate 3.99% of the base rental income and generated average sales of $200 per sq. ft. as of the
TTM ending March 2014, as calculated by Standard & Poor's.
The property also has 126 in-line, restaurant, and food court tenants, and 33 vacant units ranging from 100-35,753 sq.
ft. The property's comparable in-line sales for tenants reporting data for at least one year and excluding food court,
kiosk, and other tenants was $648 per sq. ft. for the TTM ending March 2014, as calculated by Standard & Poor's.
Excluding Apple, we calculated 17.4% in-line occupancy costs (20.0% when including Apple) by dividing the sum of
the base rent, including rent steps one year out, and reimbursements by sales for the TTM ending March 2014. We
included heating, ventilation, and air conditioning and utilities reimbursements in our calculation because we believe it
provided the most comprehensive reflection of the total costs tenants face.
Tenant summary
Table 3 shows Destiny USA Phase I's top tenants by square footage.
Table 3
Destiny USA Phase I Top Tenants
Tenant
Standard & Poor's
rating
Macy's(ii)
BB-
J.C. Penney
CCC+
Lord & Taylor(ii)
NR
Bon-Ton
Regal Carousel Mall
17
Occupied sq. ft.
% of collateral
NRA
% of total
rent(i) Lease expiration
N/A
N/A
158,590
12.8
N/A
N/A
B-
80,000
6.4
1.7 February 2016
NR
76,000
6.1
5.4 June 2023
Burlington Coat
Factory
B
61,309
4.9
2.1 September 2022
Forever 21
NR
60,950
4.9
2.5 January 2023
Sports Authority
NR
60,000
4.8
3.5 January 2021
Best Buy
BB
50,000
4.0
3.2 January 2019
Finish Line
NR
23,550
1.9
0.3 June 2019
Against All Odds
NR
21,722
1.8
0.6 Has operated on a MTM lease
since 2004
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N/A N/A
2.2 October 2015
N/A N/A
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Table 3
Destiny USA Phase I Top Tenants (cont.)
DSW
NR
21,350
1.7
1.1 September 2024
Old Navy
BBB-
20,000
1.6
1.3 January 2015
(i)As calculated by Standard & Poor's. (ii)Not part of the collateral. NRA--Net rentable area. NR--Not rated. N/A--Not applicable. MTM--Month to
month.
Tenant rollover
Except for 2015, the property generally has a staggered lease rollover schedule during the five-year loan term (see
table 4). Of the 31 leases expiring in 2015, the largest is J.C. Penney at 12.8% of collateral NRA and 2.2% of Standard
& Poor's base rent calculation.
Table 4
Destiny USA Phase I Tenant Rollover
Year
No. of leases expiring NRA (sq. ft.) % of NRA % of Standard & Poor's in-place rent
2014
2
19,307
1.6
0.50
2015
31
266,269
21.5
20.19
2016
13
109,754
8.8
7.53
2017
16
38,778
3.1
8.32
2018
12
33,236
2.7
6.96
9
73,399
5.9
7.99
2019 (Loan maturity)
2020
12
48,288
3.9
6.13
2021
10
112,636
9.1
9.10
2022
12
107,157
8.6
7.62
2023
18
181,419
14.6
13.72
2024
9
71,656
5.8
9.07
2025 and beyond
1
7,616
0.6
1.14
MTM
5
23,520
1.9
1.72
Vacant
33
147,557
11.9
N/A
183
1,240,592
100.0
100.00
Total
NRA--Net rentable area. MTM--Month to month. N/A--Not applicable.
Historical performance
Since 2009, the total mall occupancy rate has fluctuated between 39.9% and 95.6% when including the non-owned
anchor tenants and temporary tenants (or 84.9%-91.3% excluding temporary tenants). Excluding the non-owned
anchors and temporary tenants, Destiny USA Phase I was 95.6% leased. Including the non-owned anchors and
temporary tenants, Phase I was 96.9% leased. Sales per square foot have risen since the 2009 recession along with
occupancy costs, according to the historical in-line sales and occupancy costs the borrower reported (see table 5).
Table 5
Destiny USA Phase I Historical Performance(i)
Year
In-line occupancy excluding temporary tenants(%) In-line sales per sq. ft. ($) In-line occupancy costs (%)
2013
87.0
379.4
15.4
2012
83.7
386.7
14.6
2011
84.0
383.5
14.7
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Table 5
Destiny USA Phase I Historical Performance(i) (cont.)
2010
84.0
373.0
15.6
2009
78.3
358.4
16.6
2008
77.9
402.5
14.9
(i)Based on historical information provided by the issuer. TTM--Trailing 12 months.
Historical cash flow and Standard & Poor's cash flow notes
We reviewed the property's historical cash flow and the cash flows that the issuer and appraiser reported to determine
our view of the property's sustainable cash flow (see table 6).
Table 6
Destiny USA Phase I Cash Flows
2011
2012
2013
TTM ending
March 2014
Appraiser
Issuer
Standard &
Poor's
Base rent
25,745,101
26,110,646
27,992,780
28,406,059
29,693,263
32,225,254
31,834,084(i)
Expense reimbursement
21,977,662
33,167,487
22,692,718
22,660,604
23,818,918
24,583,320
25,897,916(i)
(1,211,793)
(4,521,156)
(5,773,200)(ii)
780,021
695,584
1,120,523
690,966
795,342
802,121
771,832(iii)
Income ($)
Less: vacancy
Percentage rent
Other income
218,177
310,736
418,370
336,182
300,000
297,161
297,438(iv)
1,959,819
2,253,257
2,145,232
1,986,970
1,550,000
2,109,717
1,986,970(v)
50,680,780
62,537,710
54,369,623
54,080,781
54,945,730
55,496,417
55,015,040
15,225,079
15,834,380
16,473,162
16,642,940
17,126,622
17,126,622
29,396,521(vi)
491,223
563,178
528,351
426,713
515,000
511,753
511,753(vii)
Management fees
1,754,673
1,817,811
1,570,835
1,601,206
1,648,372
1,000,000
1,000,000(viii)
Utilities
1,972,712
1,345,028
1,286,504
1,347,780
1,450,000
1,420,501
1,420,501(vii)
Repairs and maintenance
5,203,383
5,445,674
5,609,593
5,585,297
5,345,000
5,393,002
5,393,002(vii)
Specialty/temporary/kiosk
Effective gross income
Expenses ($)
Real estate taxes
Insurance
Other operating expenses
414,670
478,186
444,168
436,497
105,000
492,897
492,897(vii)
25,071,740
25,494,257
25,922,613
26,050,433
26,199,994
25,954,775
38,224,674
Leasing commissions
594,089
498,208(ix)
Tenant improvements
357,970
495,625(x)
186,089
291,178(xi)
1,138,148
1,285,011
Total operating expenses
Capital items ($)
Capital reserves
Total capital items
Additions/subtractions to NCF
NCF ($)
5,127,486(xii)
25,609,040
37,043,453
NCF haircut (%)
Capitalization rate (%)
Additions/subtractions to value
Standard & Poor's value ($)
Standard & Poor's value per sq. ft.
($)
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28,447,010
28,030,348
28,745,736
28,403,495
20,632,842
(27.36)
6.75
76,912,293(xii)
306,621,261
316
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Table 6
Destiny USA Phase I Cash Flows (cont.)
(i)Based on in-place rents as of the March 2014 rent roll. Vacant tenant spaces are grossed up at the weighted average in-place rent for the space
type. (ii)Standard & Poor's assumed a 10% vacancy rate on the rents and reimbursements, which is greater than the in-place economic vacancy
of 6.8%. (iii)Based on in-place collections as of the March 2014 rent roll. (iv)Based on the four year average. (v)Based on the TTM. (vi)Based on
the PILOT payment in 2028/2029, which is 10 years beyond the loan maturity. (vii)Based on the borrower's budget. (viii)Based on 5% of
effective gross income minus reimbursements, capped at $1 million. (ix)4% for new leases and 2% for lease renewals. (x)Calculated using the
tenant improvement costs in table 7. (xi)Based on $0.30 per sq. ft. (xii)Adjusted based on the present value of the PILOT benefit over a 15 year
period. TTM--Trailing 12 months. NCF--Net cash flow. PILOT--Payment-in-lieu-of-taxes.
We used the TI costs, renewal probabilities, and assumed lease terms listed in table 7 to calculate TI/LC costs as part
of our NCF for the various tenant types at Destiny USA Phase I.
Table 7
Standard & Poor's Leasing Costs For Destiny USA Phase I
Anchor
Theatre
New TIs per sq. ft. ($)
5.00
15.00
5.00
1.50
18.00
34.00
Renewal TIs per sq. ft. ($)
2.50
7.50
2.50
0.75
9.00
17.00
65
60
65
60
65
65
19.55
32.73
14.46
3.33
13.47
8.20
Renewal probability (%)
Assumed lease term (years)
Major Fitness center
In-line Food court
TI--Tenant improvements.
Destiny USA Phase II
Destiny Phase II is the 875,000 sq. ft. expansion of the original Carousel Mall. Pyramid reported investing more than
$145.0 million into the expansion project and the existing structures' renovation before the mall was rebranded as
Destiny USA. Phase II of the mall focuses on entertainment and restaurant tenants as well as a mix of traditional and
discount retail tenants.
Retail tenants within the expansion space include Dick's Sporting Goods, which anchors the development, as well as
Sears Outlet, TJ Maxx, and Saks Off 5th. However, major tenants also include entertainment venues such as
Revolutions, Pole Position, and Dave and Buster's. A Regal IMAX was also constructed in Phase II and opened in
2013. This mix of outlet retailers and food and entertainment tenants may increase the appeal of the mall as a
destination and differentiate it from competing traditional malls. The property also has 52 in-line and restaurant
tenants, and 39 vacant units that range from 141 to 21,000 sq. ft.
Tenant summary
Table 8 shows Destiny USA Phase II's top tenants by square footage.
Table 8
Destiny USA Phase II Top Tenants
Tenant
Standard & Poor's rating
Dick's Sporting Goods
NR
Occupied sq. ft. % of NRA % of total base rent Lease expiration
90,873
11.2
Revolutions
NR
53,400
6.6
8.4 June 2023
Pole Position
NR
41,583
5.1
3.3 July 2022
Wonderworks
NR
38,233
4.7
2.6 November 2027
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Table 8
Destiny USA Phase II Top Tenants (cont.)
Sears Outlet
CCC+
30,646
3.8
2.2 January 2018
TJ Maxx
A+
27,168
3.3
1.4 May 2023
Dave & Buster's
NR
26,591
3.3
2.1 August 2028
Saks Off 5th
NR
24,440
3.0
0.4 June 2022
Toby Keith I Love This Bar
NR
23,940
2.9
6.8 January 2023
Billy Beez
NR
22,291
2.7
4.5 November 2023
NR--Not rated.
Tenant rollover
The property faces minimal lease rollover during the loan term. Lease expirations are concentrated in 2022 and 2023,
approximately 10 years after the mall opened for business and consistent with typical 10-year lease terms for retail
space (see table 9).
Table 9
Destiny USA Phase II Tenant Rollover
Year
No. of leases expiring NRA (sq. ft.) % of NRA % of Standard & Poor's in-place rent
2014
0
0
0.0
0.00
2015
1
2,972
0.3
0.43
2016
1
10
0.0
0.14
2017
6
889
0.1
1.42
2018
3
35,554
4.1
3.15
2019 (loan maturity)
1
5
0.0
0.10
2020
0
0
0.0
0.00
2021
1
8,926
1.0
2.01
2022
21
167,862
19.2
24.29
2023
22
308,040
35.2
46.33
2024
14
59,695
6.8
13.29
2025 and beyond
3
78,747
9.0
8.83
MTM
0
0
0.0
0.00
39
211,500
24.2
N/A
112
874,200
100.0
100.0
Vacant
Total
NRA--Net rentable area. MTM--Month to month. N/A--Not applicable.
Historical performance
Phase II of the mall is currently 75.8% occupied after opening in early 2012, or 80.9% including temporary tenants and
leases out for signature, such as Michael's, which will potentially sign a lease for 21,000 sq. ft., or 2.1% of the NRA.
Historical cash flow and Standard & Poor's cash flow notes
We reviewed the property's historical cash flow and the cash flows that the issuer and appraiser reported to determine
our view of a sustainable cash flow for the property (see table 10).
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Table 10
Destiny USA Phase II Cash Flows
2012
2013
TTM ending
March 2014
Appraiser
1,428,477
9,209,109
10,584,334
18,605,196
18,211,376
14,196,238(i)
528,655
1,617,176
2,019,223
3,403,251
4,157,628
3,031,007(i)
(859,283)
(5,191,638)
Issuer Standard & Poor's
Income ($)
Base rent
Expense reimbursement
Less: vacancy
Percentage rent
Other income
Temporary tenant income
Effective gross income
2,221
115,867
351,119
1,043,315
722,663
722,663(ii)
11,803
411,488
402,504
424,483
59,190
59,190(iii)
234,565
786,668
857,567
795,906
1,333,424
857,567(iv)
2,205,721
12,140,308
14,214,747
23,412,868
19,292,643
18,866,664
5,048,291
417,257
390,179
472,443
420,000
420,000(iii)
382,430
415,360
415,826
420,700
386,404
386,404(iii)
34,200
263,575
350,812
702,386
771,706
791,783(v)
Expenses ($)
Real estate taxes
Insurance
Management fees
Utilities
837,814
917,390
994,641
1,147,363
1,106,181
1,106,181(iii)
Repairs and maintenance
970,860
2,764,740
2,998,119
3,807,070
3,484,005
3,484,005(iii)
Advertising and marketing
79,483
0
0
Other operating expenses
Total operating expenses
24,159
142,976
268,105
109,273
176,600
176,600(iii)
7,377,237
4,921,298
5,417,682
6,659,235
6,344,896
6,364,973
Capital items ($)
Leasing commissions
366,440
356,053(vi)
Tenant improvements
374,832
325,604(vii)
Capital reserves
131,130
262,260(viii)
Total capital items
NCF ($)
(5,171,516)
7,219,010
8,797,065
NCF haircut (%)
16,753,633
872,402
943,917
12,075,345
11,557,774
(4.29)
Capitalization rate (%)
6.75
Standard & Poor's value ($)
171,226,284
Standard & Poor's value per
sq. ft. ($)
196
(i)Based on in-place rents as of the March 2014 rent roll. (ii) Based on in-place collections as of the March 2014 rent roll. (iii) Based on the
borrower's budget. (iv)Based on the TTM ending March 2014. (v)Based on 5% of effective gross income minus reimbursements. (vi)4% for new
leases and 2% for lease renewals. (vii)Calculated using the tenant improvement costs in table 18. (viii)Based on $0.30 per sq. ft. TTM--Trailing 12
months. NCF--Net cash flow.
We used the TI costs, renewal probabilities, and assumed lease terms listed in table 11 to calculate TI/LC costs as part
of our NCF for the various tenant types at Destiny USA Phase II.
Table 11
Standard & Poor's Leasing Costs For Destiny USA Phase II
Anchor
Major
In-line
Theater
New TIs sq. ft. ($)
6.00
5.00
12.00
8.00
Renewal TIs per sq. ft. ($)
3.00
2.50
6.00
4.00
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Table 11
Standard & Poor's Leasing Costs For Destiny USA Phase II (cont.)
Renewal probability (%)
65
65
65
60
Assumed lease term (years)
8.0
5.8
7.7
8.3
TI--Tenant improvements.
Market Summary
Destiny USA mall is located within the Syracuse Metropolitan Statistical Area (MSA), which comprises Oswego,
Onondaga, and Madison counties and is the sixth largest MSA within the state. Syracuse is located in the northwest
portion of New York, and according to the Cushman & Wakefield appraisal, is still recovering from the recession and
lost manufacturing jobs over the past decade. Employment growth trails the nation's growth and Syracuse may face
future strain as manufacturers continue to leave the area. The local economy continues to struggle as it transitions to a
service-based economy from a manufacturing-based economy. According to the appraiser, the Syracuse metro-area's
population increased by 0.1% annually between 2003 and 2013, which is well below the 0.9% national average growth.
According to the Bureau of Labor Statistics, the Syracuse unemployment rate was 5.8% as of April 2014, compared to
7.5% in April 2013, and is below New York State's 6.7% rate and the 6.3% national average.
The primary trade area for Destiny USA is 30 miles, with a secondary trade area up to 75-100 miles, or as far as a 2.5
hour drive from the mall. The primary trade area's population is 468,542 and the average household income is $70,586
as of 2013, which is slightly below the $71,318 U.S. average.
The appraiser identified two primary competitors: Shoppingtown Mall and Great Northern Mall. Shoppingtown Mall is
owned by Moonbeam Capital Investments, a private equity firm specializing in distressed assets, which purchased the
property in 2013 after the previous owner, Macerich, defaulted on the underlying mortgage. Macerich had originally
planned to redevelop the property with an open-air lifestyle component. The property has performed reasonably well,
according to Cushman & Wakefield, but its future remains uncertain as demonstrated by its 50% occupancy. Great
Northern Mall is owned and managed by Macerich and is considered a traditional mall anchored by Macy's, Sears, and
Dick's Sporting Goods, including Toys "R" Us and BJ's Wholesale Club outparcels.
The appraiser identified six malls considered secondary competitors to Destiny USA. Of these, Crossgates Mall is of
particular note, as it is considered the dominant mall serving the Albany area. Crossgates Mall added a 33,000 sq. ft.
Dave & Buster's in 2013 and is currently undergoing an expansion to add a 100,000-sq.-ft. Lord & Taylor department
store and a 50,000-sq.-ft. Latitude 360 bowling and entertaining complex. Management is also seeking permission to
add a 20,000-sq.-ft. expansion featuring two additional restaurants and another entertainment venue.
Table 12
Competitive Shopping Centers
Property name
Property type
Gross leasable
area (sq. ft.) Anchor tenants
Sales per
sq. ft. ($)
Occupancy
(%)
Distance from
Destiny USA
250
50
4 miles east
Primary competitors
Shoppingtown Mall
Super-regional
mall
977,487 Dick's, J.C. Penney, Macy's,
Regal Cinema, Sears
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Table 12
Competitive Shopping Centers (cont.)
Great Northern
Mall
Super-regional
mall
893,396 Dick's, Macy's, Regal
Cinema, Sears
230
84
10 miles north
Secondary competitors
Salmon Run
Super-regional
mall
625,795 Bon-Ton, Dick's, J.C.
Penney, Sears
380
93
64 miles
northwest
Sangertown Square
Mall
Super-regional
mall
880,000 Dick's, J.C. Penney, Macy's,
Sears, Target
390
80
42 miles east
Crossgates Mall
Super-regional
mall
1,693,190 Dick's, J.C. Penney, Macy's,
Regal Cinema
500
80
119 miles east
Eastview Mall
Super-regional
mall
1,686,690 Bon-Ton, Home Depot, J.C.
Penney, Macy's, Lord &
Taylor, Sears, Target
500
97
65 miles west
Arnot Mall
Super-regional
mall
946,976 Bon-Ton, J.C. Penney,
Macy's, Regal Cinema, Sears
297
91
71 miles
southwest
Oakdale Mall
Super-regional
mall
857,893 Bon-Ton, J.C. Penney,
Macy's, Sears
325
95
65 miles south
Source: Cushman & Wakefield.
Property Evaluation Details
During our property evaluation, we:
• Conducted site inspections for both phases of the property;
• Derived Standard & Poor's NCFs for each of the properties and valued each of the properties based on a review of
property-level operating statements, the borrowers' budgets, and appraisal reports;
• Reviewed management and sponsorship, which included discussions with property management;
• Reviewed third-party appraisals, environmental reports, engineering reports;
• Reviewed the legal matters that we believed were relevant to our analysis.
Scenario Analysis
We performed several 'AAA' stress scenario analyses to determine how sensitive the certificates would be to a
downgrade during the loan term.
Effect of declining rental income
A decline in net rental income may constrain cash flows available for debt service. A decline in cash flows may occur
because of falling rental rates, occupancy levels, changes to operating expenses, or other factors that may decrease a
property's net income. To analyze the effect of a decline in cash flows on our ratings, we have developed scenarios in
which the NCF from the portfolio decreases by 10%-40% from our current cash flow conclusion, which is 20.4% lower
than the issuer's underwritten NCF. (See table 13 for the effect on Standard & Poor's LTV under these scenarios,
holding constant Standard & Poor's 6.75% weighted average capitalization rate, and the resulting potential transition in
the ratings on the certificates).
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Table 13
Effect Of Declining Rental Income On Standard & Poor's Ratings
Decline in Standard & Poor's NCF (%) 0.00
(10.00)
(20.00)
(30.00)
(40.00)
Potential rating migration from 'AAA'
AA
AA-
A-
BBB-
AAA
NCF--Net cash flow.
Transaction-Level Credit Enhancement
To determine a transaction's credit enhancement at each rating level, we use each loan's Standard & Poor's DSC and
LTV to calculate the stand-alone credit enhancement (SCE) and diversified credit enhancement. However, because
this transaction is secured by two loans, its SCE represents the transaction's credit enhancement at each rating level.
Our analysis of a stand-alone transaction is predominantly a recovery-based approach that assumes a loan default. We
use the loan's stand-alone LTV thresholds at each rating level to determine the expected principal proceeds that can
be recovered at default and are applicable to a loan with a 10-year loan term, a 30-year amortization schedule, and no
additional debt (a "benchmark 10/30 loan").
The mortgage loan collateral for this transaction is interest only for its entire term, and there is subordinate debt from
the mezzanine loans. To account for this additional risk, we reduced the LTV thresholds by applying negative
adjustment factors across all rating categories (see table 14).
Table 14
Implied Market Value Declines By Rating Category
Class
Preliminary rating
LTV (%)
Implied market-value decline (%)(i)
A
AAA (sf)
45.0
69.7
B
AA- (sf)
55.0
63.0
C
A- (sf)
62.5
57.9
(i)Reflects the decline in the $710 million combined appraised value (as of May 2014) that would be necessary for the transaction to experience a
principal loss at each given rating level. LTV--Loan-to-value ratio, which is based on Standard & Poor's value.
Standard & Poor's 17g-7 Disclosure Report
SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security
as defined in the Rule, to include a description of the representations, warranties, and enforcement mechanisms
available to investors and a description of how they differ from the representations, warranties, and enforcement
mechanisms in issuances of similar securities.
The Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available at
http://standardandpoorsdisclosure-17g7.com/2605.pdf.
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