Presale:
GS Mortgage Securities Trust
2016-GS4
! " # $ % & # '
(() *+ This presale report is based on information as of Nov. 10, 2016. 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
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$ % & #
'
Class
Preliminary
rating(i)
Preliminary amount
($)
LTV
(%)
Market value
decline (%)(iii)
Debt yield
(%)(iv)
AMA-A
AA- (sf)
16,118,000
50.0
69.4
14.0
,! X-AMA
BB- (sf)
101,600,000(ii)
N/A
N/A
N/A
! -+ .
AMA-B
A- (sf)
21,917,000
57.5
64.8
12.2
++ /+
AMA-C
BBB- (sf)
27,032,000
66.8
59.1
10.5
!
AMA-D
BB- (sf)
36,533,000
79.3
51.4
8.8
225-A
AA- (sf)
12,964,000
55.0
70.0
13.1
X-225
B- (sf)
113,000,000(ii)
N/A
N/A
N/A
225-B
A- (sf)
18,405,000
62.5
65.9
11.6
225-C
BBB- (sf)
22,576,000
71.7
60.9
10.1
225-D
BB- (sf)
30,673,000
84.2
54.1
8.6
225-E
B- (sf)
28,382,000
95.8
47.8
7.5
(i)The rating on each class of securities is preliminary and subject to change at any time. The issuer will
issue the certificates to qualified institutional buyers in-line with Rule 144A of the Securities Act of
1933. (ii)Notional balance. The notional amount of the class X-225 certificates will be equal to the
certificate balance of the class 225-A, 225-B, 225-C, 225-D, and 225-E certificates. The notional amount
of the class X-AMA certificates will be equal to the certificate balance of the class AMA-A, AMA-B,
AMA-C, and AMA-D certificates. (iii)For the class AMA certificates, reflects the approximate decline in
the $477.0 million "as is" appraised value that would be necessary to experience a principal loss at the
given rating level. For the class 225 certificates, reflects the approximate decline in the $450.0 million
"as is" appraised value that would be necessary to experience a principal loss at the given rating level.
(iv)Based on S&P Global Ratings' NCF and the mortgage balance of the AMA Plaza loan and 225 Bush
loan, individually. LTV--Loan-to-value ratio, based on S&P Global Ratings' values. NCF--Net cash flow.
N/A--Not applicable.
Primary Credit Analyst:
John V Connorton III, New York (1) 212-438-3892; [email protected]
Secondary Contact:
James C Digney, New York (1) 212-438-1832; [email protected]
See complete contact list on last page(s)
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Profile
Expected closing
date
Nov. 30, 2016.
Collateral
The GS Mortgage Securities Trust 2016-GS4 transaction is secured by 33 loans
totaling $1,026.5 million. Because S&P Global Ratings will only assign ratings to
the loan-specific certificates referencing the AMA Plaza and 225 Bush Street
loans, we did not analyze the other 31 loans.The AMA Plaza whole loan is split
into a senior loan, a pari passu companion loan, a trust subordinate companion
loan, and a nontrust subordinate companion loan. The senior loan ranks pari
passu with the pari passu companion loan, and both receive payments pro rata.
The senior loan is referenced by the pooled certificates (classes A through G),
and the trust subordinate companion loan is referenced by the loan-specific
certificates (classes AMA-A, AMA-B, AMA-C, AMA-D, and X-AMA). Neither the
pari passu companion loan nor the nontrust subordinate companion loan will be
included in this transaction. The AMA Plaza whole loan has an aggregate
outstanding principal balance of $304.0 million and is secured by the borrower's
fee simple interest in the office portion of AMA Plaza, an office property located
in Chicago, and the leasehold interest in an adjacent parking garage.The senior
loan, the pari passu companion loan, the trust subordinate companion loan, and
the nontrust subordinate companion loan are collectively secured by the same
mortgage on the property. The senior loan, the pari passu companion loan, and
the trust subordinate companion loan will be serviced and administered
according to the pooling and servicing agreement for this securitization. The
225 Bush Street whole loan is split into a senior loan, a pari passu companion
loan, and a trust subordinate companion loan. The senior loan ranks pari passu
with the pari passu companion loan, and both receive payments pro rata. The
senior loan is referenced by the pooled certificates (classes A through G), and
the trust subordinate companion loan is referenced by the loan-specific
certificates (classes 225-A, 225-B, 225-C, 225-D, 225-E, and X-225). The pari
passu companion loan will not be included in this transaction. The 225 Bush
Street whole loan has an aggregate outstanding principal balance of $235.0
million and is secured by the borrower's fee simple interest in 225 Bush Street,
an office property located in San Francisco.The senior loan, the pari passu
companion loan, and the trust subordinate companion loan are collectively
secured by the same mortgage on the property. The senior loan, the pari passu
companion loan, and the trust subordinate companion loan will be serviced and
administered according to the pooling and servicing agreement for this
securitization.
Class AMA payment
structure
The AMA loan-specific classes will receive sequential interest payments and
principal distributions only from repayments allocable to the trust subordinate
companion loan's percentage interest in the AMA Plaza loan. After an event of
default, principal distributions will be made first to the pooled portion of the
loan and then to the loan-specific certificates. Realized losses will be allocated
in reverse sequential order, starting with the class AMA-D.
Class 225 payment
structure
The 225 loan-specific classes will receive sequential interest payments and
principal distributions only from repayments allocable to the trust subordinate
companion loan's percentage interest in the 225 Bush Street loan. Principal
distributions will be made first to the pooled portion of the loan and then to the
loan-specific certificates. Realized losses will be allocated in reverse sequential
order, starting with the class 225-E.
Loan seller
Goldman Sachs Mortgage Co.
AMA Plaza borrower
BCSP 330 North Wabash Property LLC, a Delaware limited liability company.
225 Bush Street
borrower
225 Bush Street Owners LLC, a Delaware limited liability company.
Servicer, AMA Plaza
loan special servicer,
and certificate
administrator
Wells Fargo Bank N.A.
225 Bush Street loan
special servicer
Aegon USA Realty Advisors LLC.
Trustee
Wilmington Trust N.A.
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Rationale
The preliminary ratings assigned to GS Mortgage Securities Trust 2016-GS4's $214.600 million commercial mortgage
loan-specific pass-through certificates reflect S&P Global Ratings' view of the AMA Plaza and 225 Bush Street loan
collateral's historical and projected performance, the sponsors' and managers' experience, the trustee-provided
liquidity, the loans' terms, and the transaction's structure. We determined that the AMA Plaza loan has a beginning and
ending loan-to-value (LTV) ratio of 104.0% and that the 225 Bush Street loan has a beginning and ending loan-to-value
(LTV) ratio of 95.8%, based on their respective S&P Global Ratings' values.
Since interest and principal payments, as well as the application of any losses, on the AMA and 225 certificates will
only be made from income and losses from the AMA Plaza and 225 Bush Street loans, respectively, we will only rate
the classes specific to these two loans and did not analyze any other loans in the pool.
Transaction Overview
An overview of the transaction's structure, cash flows, and other considerations follows (see chart 1).
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AMA Plaza Loan Strengths And Risk Considerations
Strengths
The AMA Plaza loan exhibits the following strengths:
• The whole mortgage loan has strong debt service coverage (DSC) of 1.88x, calculated using the 3.53% fixed interest
rate and our in place net cash flow (NCF) for the property, which is 11.6% lower than the issuer's NCF.
• AMA Plaza is a 52-story, 1.1 million-sq. ft. class-A office building originally built in 1971 located in Chicago's River
North submarket in the heart of downtown Chicago. The property is LEED-Gold-certified and is a Chicago landmark
listed on the National Register of Historic Places. Floors 14 and above, as well as the leasehold interest in a
neighboring 902-stall parking garage, serve as the loan's collateral.
• From 2006 to 2014, the property was repositioned through a $73.7 million base-building capital expenditure plan,
restoring it to modern class A office standards. The redevelopment included new branding and signage, the cleaning
and restoration of the exterior plaza granite and interior lobby granite, and the revitalization of the lobby lighting,
among other upgrades.
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• The property offers a variety of amenities, including 902 parking spaces just north of the building, a new conference
center , a new fitness center, and several dining options. The property shares a ground floor lobby with the
noncollateral Langham Hotel, which occupies floors two to 13 of the property, and brings numerous amenities to
the property.
• The three largest tenants at AMA Plaza have lease terms extending beyond the five-year loan term, running to 2028,
2029, and 2027, respectively. Office tenants at the property have an average remaining lease term of 8.6 years, with
only 3.4% of net rentable area (NRA) and 3.7% of in-place total rents scheduled to roll during the loan term, as
calculated by S&P Global Ratings. SmithBucklin Corp., the third-largest tenant, has a one-time right to terminate its
lease in June 2025 with 12 months' notice.
• The transaction's structure holds the borrower 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. In addition, the servicer must make administrative
advances to cover interest shortfalls (if they are deemed recoverable from the liquidation proceeds) that would
otherwise arise from these expenses if the borrower does not pay them on time (provided the collateral has
sufficient value). We believe this will help avoid or mitigate the risk of shortfalls to certificateholders.
Risk considerations
The risks we considered for the AMA Plaza loan include:
• The whole loan balance is highly leveraged, with a 104.0% S&P Global Ratings' LTV based on our valuation and the
$304.0 million whole loan balance. The LTV based on the appraiser's "as is" valuation is 63.7%. Our estimate of
long-term sustainable value is 38.7% lower than the appraiser's "as is" valuation.
• The mortgage loan is interest only for its entire five-year term, so there will be no scheduled amortization during the
loan term. Compared with an amortizing loan, an interest-only loan bears a higher refinance risk because of the
higher loan balance at maturity. We used lower LTV thresholds at each rating category to account for the lack of
amortization.
• The transaction is concentrated by property type, sponsor, and geographic location. The collateral consists of one
loan secured by one office building located in Chicago.
• The current level of taxes is less than half of the property's full tax burden because it benefits from a property tax
incentive available to Chicago landmarks. The landmark designation became effective in 2014, when the assessment
rate was lowered from 25% to 10%. Over the 10 years since going into effect, the property will be assessed at 10%
of market value, 15% in year 11, and 20% of market value in year 12. The abatement will burn off in year 13 (2027).
S&P Global Ratings considered the declining benefit of these temporary tax savings in its valuation.
• The first-mortgage loan is split into two senior notes: a B-note and a C-note. The C-note is junior to the trust asset,
which may complicate and lengthen an enforcement process in an event of default. In addition to the first-mortgage
loan, there is $75.0 million preferred equity investment, which increases the S&P Global Ratings' LTV ratio to
129.7% from 104.0%. We used lower LTV thresholds at each rating category to account for both the secured and
unsecured additional debt.
• The property has only a leasehold interest in the neighboring 902-stall parking garage. The garage lease extends
through 2059, including extensions, and the lease payment is due to reset in 2019 based on the then-current value of
the underlying land. We estimate that the parking garage expense could nearly triple, and incorporated this
increased expense in our valuation of the loan collateral. However, the ground rent expense represents only 1.4% of
the property's total expenses, as calculated by S&P Global Ratings.
• The loan sponsor reportedly has begun negotiations with an existing tenant to give back its space in the building in
exchange for a commitment to lease additional square footage in another Chicago office building it owns. The
tenant is below the major lease threshold, and lender approval is not required. Based on the very preliminary
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information we have received, the tenant, which represents approximately 3% of the square footage and 3% of the
total gross rent as calculated by S&P Global Ratings, would remain in place through at least third-quarter 2017. We
considered the preliminary stages of the negotiation, the lead time between a potential tenant departure, the
tenant's below-market rent, the already slightly above-market vacancy rate at the property, as well the significant
S&P Global Ratings variance with the appraised value (38.9%), and continued to include the tenant as occupied.
AMA Plaza Loan Characteristics
Mortgage loan
The AMA Plaza loan has a $304.0 million whole mortgage loan balance. The loan is interest only for its entire five-year
term and has a 3.5255% weighted average fixed interest rate. Of the $304.0 million whole mortgage loan balance, a
$100.0 million senior note A-1 is included in this securitization and references the pooled certificates. The $30.0 million
senior note A-2 ranks pari passu with the A-1 note but is not an asset of the trust (the senior companion note).
The note B, referred to as the trust subordinate companion loan, is junior to the senior notes and references the
loan-specific certificates. The note C, referred to as the nontrust subordinate companion loan, is junior to the note B
and is not an asset of the trust. The loan structure is illustrated in chart 2 below.
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Some or all of the companion notes may be securitized in a future transaction(s).
The whole mortgage loan will be serviced and administered according to the trust and servicing agreement for this
securitization.
Preferred equity
At loan origination, Metropolitan Life Insurance Co. provided a preferred equity investment of $75.0 million to the
indirect parent of the loan's borrower in conjunction with the acquisition of AMA Plaza. The preferred equity is
subordinate to the loan, the reserves required under the loan documents, and the funds required to operate the
property.
The preferred equity investment has an annual rate of return of 9% per year (or in the case of an event of default, 14%
per year), compounded monthly, beginning Nov. 1, 2016, and continuing on each payment date thereafter until the
preferred equity has been repaid in full. The final, mandatory redemption date is required to be the earliest of Oct. 1,
2023, or the AMA Plaza whole loan's maturity date (October 2021), and the date of delivery of a demand notice by the
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preferred equity holder following an event of default under the preferred equity documents.
We believe this preferred equity investment presents risks that resemble mezzanine debt, including dilution of the
borrower's equity in the mortgaged property and stress on the cash flow in the form of a preferred return or excess
cash payments. We used lower LTV thresholds at each rating category to account for both the secured and unsecured
additional debt.
Borrower/sponsor
The borrower for the loan is BCSP 330 North Wabash Property LLC, a Delaware limited liability company. The
borrower is controlled by Beacon Capital Strategic Partners VII L.P. (BCSP VII), a real estate investment fund operated
by Beacon Capital Partners (Beacon), a private real estate investment firm.
Formed in 2014, BCSP VII, along with its sister investment vehicle, is a real estate investment vehicle that specializes
in office investments in major urban markets across the U.S. It closed its first investment in 2014 and as of Sept. 30,
2016, had an interest in 11 properties totaling 6.0 million sq. ft. located primarily in New York, Boston, Chicago,
Seattle, and California. As of Sept. 30, 2016, the fund had total assets of approximately $1.5 billion and $768.2 million
of uncalled commitments. Beacon's Chicago holdings include 515 North State Street (651,500 sq. ft.) and One North
Dearborn (832,000 sq. ft.).
BCSP VII Investments L.P., an indirect owner of the borrower, is the non-recourse carve-out guarantor for the loan.
Trade payables
Trade payables incurred in the ordinary course of operations are permitted up to 2.0% of the mortgage loan balance.
The loan agreement requires trade payables to be repaid within 60 days of the date billed.
Reserves
A summary of the reserves for the loan follows (see table 1).
Table 1
Reserves – AMA Plaza
Taxes, ground rent, and
insurance premiums
None upfront. During a trigger period, on each payment date, the borrower will deposit an amount equal to 1/12 of
the estimated real estate taxes, ground rent, and insurance premiums payable in the ensuing 12 months. If AMA Plaza
is insured under a blanket policy as per the related loan documents, no deposits related to insurance are required.
Capital expenditures
None upfront. During a trigger period, on each payment date, borrower will deposit $23,323 monthly ($0.25 per sq.
ft.).
TI/LC reserve
None upfront. During a trigger period, on each payment date, the borrower will deposit $93,292 monthly. Lease
termination fees will also be deposited into this reserve.
Unfunded obligations
$3.080 million upfront for unfunded tenant improvements for BDO USA, Patton and Ryan, Thornton Tomasetti, and
Enlivant.
Free rent
$2.873 million upfront for free rent for various tenants.
TI/LC--Tenant improvements and leasing commission.
A trigger period means any period commencing with the fiscal quarter ending June 2017, during which the net
operating income (NOI) debt yield (based on the $304 million whole loan amount) for two consecutive fiscal quarters is
less than 6.25% and ending when the debt yield for two consecutive fiscal quarters thereafter is equal to or greater
than 6.25%, or, commencing 10 business days following the borrower's receipt of written notice of its failure to deliver
monthly, quarterly, or annual financial reports, and ending when such reports are delivered and they indicate that no
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other trigger period is ongoing. The borrower can prevent a trigger period that is reasonably expected to commence
within 90 days, or terminate an ongoing trigger period by partially defeasing the AMA Plaza whole loan.
Cash management
The borrower has established a lender-controlled hard lockbox account in its name. Tenants must deposit rents and
other revenues directly into the lockbox account. As long as no trigger period or event of default under the AMA Plaza
whole loan is continuing, all amounts in the lockbox account will be swept on each business day into a
borrower-controlled operating account. During a trigger period or during an event of default under the AMA Plaza
whole loan, all amounts in the lockbox account will be swept on each business day to a lender-controlled cash
management account.
On each due date during a trigger period or, at the lender's discretion, during an event of default under the AMA Plaza
whole loan, the loan documents require that all amounts on deposit in the cash management account exceeding the
amount required on that due date to pay debt service, required reserves, and budgeted operating expenses, be held as
additional collateral for the AMA Plaza whole loan.
Insurance
We reviewed the loan's insurance provisions and providers and determined that they are generally consistent with our
property insurance criteria and normal market standards.
The borrower must maintain comprehensive all-risk insurance, including windstorm, boiler and machinery,
commercial general liability, and terrorism insurance for the mortgaged property that at least equals the property's full
replacement cost. In addition, the borrower must have business interruption insurance covering the 18-month period
from the date of any casualty and containing an extended period of indemnity endorsement covering the 12-month
period commencing on the date when the property has been restored.
Property Characteristics
Collateral description
AMA Plaza is a 52-story, 1.1 million-sq. ft., class-A office building located in Chicago's River North submarket in the
heart of downtown Chicago on the bank of the Chicago River. The Ludwig Mies van der Rohe-designed property is
LEED-Gold-certified and is a Chicago landmark listed on the National Register of Historic Places. Floors 14 and above,
as well as the leasehold interest in a neighboring 902-stall parking garage, serve as the loan's collateral.
The property was originally built in 1971 as IBM's Chicago headquarters. From 2006 to 2014, the property was
repositioned through a $73.7 million base-building capital expenditure plan, updating it to modern class A office
standards. The buildingwide repositioning included new branding and signage, cleaning and restoring the exterior
plaza granite and interior lobby granite, revitalizing the lobby lighting, new elevator cabs, a green roof, and new
multitenant floor elevator lobbies, corridors, and restrooms.
The mechanicals were also upgraded, including the installation of a new HVAC system, state-of-the-art fire life safety
systems, a new automation system, a complete retrofit of the existing air handlers, and the addition of new variable
speed pumps for chilled water. The existing boilers were also replaced.
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The property offers a variety of amenities, including 902 parking spaces just north of the building, a new conference
center with state-of-the-art audio and visual technology on the 14th floor, a new fitness center, and several dining
options on the 16th floor. The property shares a ground floor lobby with the noncollateral Langham Hotel, a
316-guestroom luxury hotel that occupies floors two 13 of the property. The hotel brings numerous amenities to the
building, including a restaurant, lounge and wine room, fitness center, indoor pool and spa, and two ballrooms.
The property is currently 86.2% occupied by 19 tenants, as calculated by S&P Global Ratings, including a Hertz,
Dunkin' Donuts and Tobmar International retail tenants.
Site visit details
Overall, the property showed well and its location about two blocks from the Chicago Loop makes it easily accessible.
The building has good connectivity to Chicago Transit Authority (CTA) trains, with all connecting subway lines
approximately two blocks from the building. The Langham Hotel is served by a 24/7 cab line, and the taxis are
available to office tenants as well. There are no direct CTA buses to the building, but in our opinion the location is
highly walkable except for in extreme winter conditions.
The building's lobby looks slightly dated compared to the other buildings in the Chicago Loop, which have a more
updated and contemporary look. Building management mentioned there are some restrictions on the renovations in
the lobby area due to hotel and the building's external façade. The building amenities include a fitness center,
conference room, and cafeteria, which also had a slightly dated feel. Management discussed the possibility of
converting spaces on the first floor to retail depending on availability to increase the retail and dining options, which
would improve the building's offerings as many of its competitors have more extensive in-building retail and eating
options.
The higher floors of the building provide impressive views of downtown Chicago, especially from the AMA space.
Overall, the building has good locational advantages and has made efforts to offer an office product that would appeal
to a more urban contemporary workforce.
Market summary
CoStar reports that, in second-quarter 2016, the national office occupancy rate reached a business cycle high of 89.4%,
which is within 0.3% of the previous cycle's peak in fourth-quarter 2006. CoStar expects national vacancy rates to
continue to decline until 2018, at a slowing rental growth rate of 3.0%-3.5% annually. The positive market outlook is
based on an annual office job growth of 2.4% versus a 1.8% growth rate for total employment.
Net deliveries of new space are expected to total just under 75 million sq. ft. in 2016, reflecting a five-year consecutive
growth rate since 2011. Chicago is one of the most active construction markets, with 8 million sq. ft. currently
underway. This is only exceeded by Dallas (11 million), Washington D.C. (9 million), and San Jose (9 million).
Chicago is the third-largest office market according to CoStar, with 469 million sq. ft. (for comparison, Washington
D.C. has 485 million sq. ft. and New York City has 890 million sq. ft.). Its overall vacancy rate currently stands at
13.1%, and rental rates grew by 2.1% year over year. CoStar expects the Chicago vacancy rate to decline to 12.5% and
gross asking rents to increase by 3.6% by 2018. This would drive rents above the historical peak.
Due to superior transportation and access to a young, highly educated workforce, a number of large firms have
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recently decided to move downtown from the Chicago suburbs, including McDonalds, Motorola Solutions, AT&T, and
United Airlines, which was beneficial for both occupancy rates and rental growth in the submarket.
AMA Plaza is located in the River North submarket, across the Chicago River from the West and Central Loops.
Located in the northwest portion of the central business district (CBD), the submarket is bound by Division Street to
the north, the Chicago River to the south, Rush Street to the east, and Halsted Street to the west. Representing
approximately 11.0% of the overall CBD market, the River North submarket consists of more than 13.9 million sq. ft. of
inventory, of which 40.9% is considered to be class B quality, according to Cushman & Wakefield. Office buildings in
the River North submarket are generally older and smaller compared to competing CBD submarkets.
River North continues to evolve into a district for corporations and residents. Its skyline features a mix of residential
condominiums, high-rise office buildings, and hotels intermixed with vintage loft buildings. The area features several
galleries, studios, offices, apartments, and boutiques. The uniqueness of office space, stemming from the renovations
of early 1900s commercial space and recent developments, has led to an influx of technology, architecture firms, and
advertising companies into the community along with major law firms and prominent financial companies.
Per CoStar, in contrast to the West Loop, where inventory is set to rise by about 6% with the completion of the 1.1
million-sq.-ft. River Point and the 1.3 million-sq.-ft. 150 N. Riverside Drive office buildings, no major projects have
broken ground in River North since the 2009 completion of 300 North LaSalle St. and 353 North Clark St., which added
2.5 million sq. ft. of four- and five-star space to the submarket (nearly a quarter of all such product). However, 3.3
million sq. ft. of office space is proposed as a part of Hines' planned Wolf Point development, which could alter the
supply and demand balance in the market.
Per Cushman & Wakefield, the overall vacancy rate in the River North submarket decreased 90 basis points (bps) over
the previous 12-month period to 12.0% in first-quarter 2016, while during this same period, the direct vacancy rate
decreased 70 bps. At that time, the class A direct vacancy rate was 13.3%. In first-quarter 2016, the direct asking gross
rental rate of $38.74 per sq. ft. represents a 15.4% increase from the first-quarter 2015 gross rate of $33.58 per sq. ft.
During this period, the direct asking rental rate for class A space increased 17.0% to a $43.81 per sq. ft. gross.
The appraiser also referenced additional Cushman & Wakefield research, citing a 11% class A River North direct
vacancy, and competitive property vacancy statistics of 5.7%, in reaching a 4.36% total vacancy and collection loss for
the property.
Based on recent leasing at the subject and comparable properties, the appraiser concluded a weighted average net
market rent of $24.47 per sq. ft., compared with an in-place net rent per the appraisal of a $22.04 per sq. ft. net
equivalent. The appraiser believes the building to be approximately 10% below market levels.
Competitive set
The appraiser surveyed data from comparable buildings located in downtown Chicago to conclude market rent for the
property. The subject property competes most directly with other class A and B office buildings in the immediate area
along the Michigan Avenue, Chicago River, and Wacker Drive corridors.
The weighted average direct occupancy for these buildings is 94.3%, and they have gross rents ranging from $36.72 to
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$65.69, with a weighted average of $47.93. For the subject property, we used base office gross rents of $43.39, on
average, which is in the middle- to upper-range of the band and in line with the competitive set's mean gross rent.
Table 2
Competitive Office Buildings Per Appraisal – AMA Plaza
Property name
Submarket
Year built
NRA (sq. ft.) % occupied (total) Gross rent per sq. ft. (low/high)($)
300 North LaSalle Street
River North
2009
1,302,901
98.7
61.69-65.69
Mesirow Financial Building River North
2009
1,184,255
95.3
53.00-54.00
321 North Clark Street
River North
1987
896,502
96.1
41.08-44.08
333 West Wacker Drive
West Loop
1983
867,821
95.5
36.72-40.72
225 West Wacker Drive
Central Loop
1989
650,812
89.1
41.19-45.19
77 West Wacker Drive
Central Loop
1992
959,258
89.5
46.56-54.56
401 North Michigan
North Michigan 1965
737,308
95.7
40.77-45.77
NRA--Net rentable area.
Tenants
The property is currently 86.2% occupied by 19 tenants, including the Hertz, Dunkin' Donuts, and Tobmar
International retail tenants, which occupy approximate 1.2% of the building's square footage.
The American Medical Assn. is the largest tenant in the building, and the property serves as their global headquarters.
The tenant occupies floors 39-47. All of their leases expire in August 2028. The tenant occupies 289,452 sq. ft. (25.9%)
and contributes 35.1% of the gross rental income.
The second-largest tenant is Latham & Watkins, which occupies 143,475 sq. ft. (12.8%) on floors 26-30 and contributes
15.4% of the gross rental income. Latham & Watkins, whose lease expires March 2029, is a national law firm.
The third-largest tenant is SmithBucklin Corp., an association management and professional services company. The
tenant occupies 115,129 sq. ft. (10.3%) on floors 14 and 18-20 under a lease expiring December 2027. Their lease
accounts for 11.0% of the total gross rental income. The tenant has a one-time right to terminate its lease in June 2025
with 12 months' notice.
Table 3 shows a summary of the property's top tenants.
Table 3
Top Tenants – AMA Plaza
Tenant
S&P Global
Ratings' credit
rating
Occupied space
(sq. ft.)
% of collateral
NRA
% of S&P Global
Ratings' total rent(i)
Total rent per Lease
sq. ft. ($)(i) expiration
American Medical
Assn.
NR
289,452
25.9
33.1
47.94 Aug 31, 2028
Latham & Watkins
NR
143,475
12.8
15.4
44.90 March 31, 2029
SmithBucklin Corp.
NR
115,129
10.3
11.0
40.10 Dec. 31, 2027
Swanson Martin &
Bell
NR
78,935
7.1
6.8
36.10 May 31, 2022
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Table 3
Top Tenants – AMA Plaza (cont.)
Tenant
S&P Global
Ratings' credit
rating
BDO USA
NR
Occupied space
(sq. ft.)
% of collateral
NRA
% of S&P Global
Ratings' total rent(i)
66,540
5.9
7.6
Total rent per Lease
sq. ft. ($)(i) expiration
47.89 July 31, 2027
(i)Based on S&P Global Ratings-calculated reimbursements, which are based on a higher level of real estate tax reimbursements due to S&P
Global Ratings' inclusion of unabated real estate tax expenses. Actual total gross rents are approximately $4.00 lower based on the rent
abatement. NR--Not rated.
Tenant rollover
The property faces minimal tenant rollover risk during the five-year loan term. The three largest tenants at AMA Plaza
have lease terms extending beyond this term, running to 2028, 2029, and 2027, respectively. The third-largest tenant,
SmithBucklin Corp., has a one-time right to terminate its lease in June 2025 with 12 months' notice. Office tenants at
the property have an average remaining lease term of 8.6 years, with only 3.4% of the NRA and 3.7% of in-place total
rents scheduled to roll during the loan term, as calculated by S&P Global Ratings.
Table 4
Tenant Rollover – AMA Plaza
Year
No. of leases expiring(i)
NRA (sq. ft.)
% of NRA
% of S&P Global Ratings' total rent
2016
0
0
0.0
0.0
2017
1
10,124
0.9
0.7
2018
2
15,161
1.4
1.5
2019
0
0
0.0
0.0
2020
2
12,791
1.1
1.4
2021
0
0
0.0
0.0
2022
4
78,935
7.1
6.8
2023
3
62,164
5.6
6.1
2024
7
118,475
10.6
12.0
2025
2
30,422
2.7
3.5
2026
1
7,339
0.7
0.9
16
629,170
56.2
67.1
2027 and beyond(ii)
Vacant
Total
N/A
154,922
13.8
XX
38
1,119,503
100.0
100.0
(i)As calculated by S&P Global Ratings. Represents number of leased spaces identified in the rent roll, whether or not a given lease governs more
than one occupied space. (ii)Includes management and amenity spaces. N/A--Not applicable.
Capital expenditures
From 2006 to 2014 the property was completely redeveloped through a $73.7 million base-building capital expenditure
plan to update it to modern class A office standards. The buildingwide redevelopment is discussed in detail in the
Collateral description section above.
Management agreement
The AMA Plaza property is currently managed by BCSP VII Property Management LLC. The lender can replace, or
require the borrower to replace, the property manager with a property manager selected by the borrower, subject to
lender's reasonable approval:
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• During an event of default under the AMA Plaza whole loan;
• Following any foreclosure, conveyance in lieu of foreclosure, or other similar transaction;
• During the continuance of a material default by the property manager under the management agreement (after the
expiration of any applicable notice and/or cure periods),
• If the property manager files for or is the subject of a petition in bankruptcy; or
• If a trustee or receiver is appointed for the property manager's assets or the property manager makes an assignment
for the benefit of its creditors or is adjudicated insolvent.
A replacement manager can be any property management affiliate of sponsor, a reputable management company with
at least five years' experience managing at least five properties substantially similar to the property and at the time of
its engagement as property manager has under management leasable square footage of class A office space equal to at
least four times the leasable square footage of the property (not including the property), provided such management
company is not the subject of a bankruptcy or similar insolvency proceeding, or any other management company
approved by lender in its reasonable discretion, and that is subject to rating agency confirmation.
Any management fees payable to any property manager are subordinate to debt service payments due under the loan
agreement. Per the in-place agreement, the property management fees are 4.0% of gross revenues. In our analysis, we
assumed a $1.0 million management fee, which represents a market rate for the class and type of property.
AMA Plaza Historical Cash Flow And S&P Global Ratings' Cash Flow Notes
We reviewed the historical cash flows and the issuer cash flows to determine our view of a sustainable cash flow for
the property. We summarized the historical and S&P Global Ratings' NCF for the property below (see table 5).
Table 5
AMA Plaza Cash Flows
2013
Occupancy rate (%)
Average rental rate (%)
2014
2015 TTM June 2016
Banker S&P Global Ratings
61.6
89.7
94.6
93.4
86.7
86.2
16.67
20.81
21.47
22.07
24.73
24.80
27,686,944
27,812,738(i)
11,496,477 20,901,625 22,738,998
23,071,662
(5,943,372)
(6,828,257)(ii)
12,594,528 16,178,419
20,918,300(iii)
Income ($)
Gross potential rent
Base rent
Less: vacancy loss
Expense reimbursement
6,724,066
5,914,893
9,692,173
Parking income
1,887,026
2,436,018
2,898,502
2,840,362
2,840,362
2,840,362(iv)
Other income
1,042,647
1,528,881
1,234,654
1,293,606
1,293,606
1,293,606(v)
264,089
297,054
290,757
228,334
228,334
228,334(vi)
Other rental revenue
Effective gross income
Reimbursement percentage
46,265,083
41.7
40.0
52.8
68.9
92.5
91.4
4,027,913
2,678,616
5,881,078
5,723,205
5,146,661
9,981,592(vii)
Operating expenses ($)
Real estate taxes
Property insurance
Utilities
312,944
279,601
213,522
193,505
226,300
226,300(viii)
2,992,557
2,688,334
2,653,248
2,563,548
2,563,548
2,635,043(ix)
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Table 5
AMA Plaza Cash Flows (cont.)
2013
2014
2015 TTM June 2016
Banker S&P Global Ratings
Repairs and maintenance
3,204,457
3,062,878
3,119,620
2,939,492
2,939,492
3,040,664(ix)
Janitorial
1,389,300
1,946,418
2,074,458
2,098,312
2,098,312
2,039,730(ix)
Management fees
578,630
582,524
897,086
1,241,602
1,000,000
1,000,000(x)
Payroll and benefits
887,423
909,421
904,121
892,527
892,527
902,023(ix)
Advertising and marketing
106,069
113,348
91,792
90,088
90,088
98,409 (ix)
Professional fees
431,692
371,131
331,781
322,708
322,708
341,874(ix)
1,991,923
1,943,554
1,969,701
1,992,824
1,992,824
1,968,693(ix)
220,664
220,664
220,664
220,664
220,664
649,000(xi)
18,278,475 17,493,124
22,883,327
General and administrative
Other expenses
Ground rent
Total operating expense
16,143,571 14,796,490 18,357,072
Operation expense ratio
Net operating income
75.4
47.6
49.8
5,270,735 16,281,980 18,498,011
45.7
41.4
49.5
21,750,017 24,791,170
23,381,756
Leasing commissions
699,309
1,127,431
Tenant improvements
699,309
1,408,145
Capital expenditures
279,876
447,801(x)
1,678,494
2,983,378
21,750,017 23,112,676
20,398,378
Total capital items
Net cash flow ($)
5,270,735 16,281,980 18,498,011
Add to NCF
NCF for DSCR purposes
61.6
89.7
94.6
93.4
86.7
41,497
16.67
20.81
21.47
22.07
24.73
20,439,875
Haircut to issuer NCF (%)
Capitalization rate (%)
Initial value ($)
Add to Value ($)
S&P Global Ratings' value ($)
S&P Global Ratings' value per sq. ft. ($)
(11.6)
7.00
291,405,401
829,935
292,235,335
261
NCF--Net cash flow. TTM--Trailing 12 months. DSCR--Debt service coverage ratio.
Cash flow notes
(i)Based on the rent roll as of Oct. 1, 2016, with rent steps through Oct. 31, 2017. Excludes income from tenants
currently in place that have provided notice of intent to vacate. Vacant spaces grossed up at the weighted average in
place rents.
(ii)Concluded vacancy based on various market reports including CoStar, Cushman & Wakefield, and CBRE Group Inc.
(iii)Grossed up to include vacant spaces, and includes a higher level of real estate tax reimbursements due to S&P
Global Ratings' inclusion of unabated real estate tax expenses.
(iv)Based on the trailing 12 months.
(v)Based on the trailing 12 months. Includes storage income, tenant services income, and other miscellaneous income
items.
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(vi)Based on the trailing 12 months. Includes antennae income and other miscellaneous rental income.
(vii)Represents unabated tax expenses.
(viii)Based on the actual insurance premium.
(ix)Average of 2014, 2015, and trailing 12 months.
(x)S&P Global Ratings' guidelines.
(xi)Based on the appraisal's estimate of the ground rent in 2019.
To calculate tenant improvement (TI) costs as part of S&P Global Ratings' NCF for the major tenant types at the
property, S&P Global Ratings used the TI costs, renewal probabilities, and assumed lease terms listed in table 6.
Table 6
S&P Global Ratings' Leasing Costs – AMA Plaza
Office
Retail
New TIs ($/sq. ft.)
22.00
10.00
Renewal TIs ($/sq. ft.)
11.00
5.00
Renewal probability (%)
65
65
Assumed lease term (years)
10
5
TIs--Tenant improvements.
225 Bush Street Loan Strengths And Risk Considerations
Strengths
The 225 Bush Street loan exhibits the following strengths:
• The whole mortgage loan has strong DSC of 1.88x, calculated using the 3.951% fixed interest rate and our in-place
NCF for the property, which is 16.4% lower than the issuer's NCF.
• The property is a 575,363-sq.-ft. iconic office building located in San Francisco's downtown financial district, one
block from Market Street. It was developed in 1922 by John Rockefeller and received several renovations after
being expanded in 1950. During its most recent renovation between 2010 and 2013, the property received close to
$13 million in capital improvements, which focused on both of the lobbies and the facade.
• The property is approximately 93.0% occupied by a diverse group of 47 tenants, with approximately 14% of the
NRA leased to investment-grade tenants rated by S&P Global Ratings. The property's current occupancy is in line
with that of its Financial District submarket. Additionally, the property has demonstrated strong recent leasing
momentum, with new and renewal leases since 2014 accounting for about 43.5% of the property's total NRA.
• The property has benefited from its sponsorship by Genzon Investment Group Co. Ltd. (Genzon). Genzon acquired
the property in 2014 as part of a joint venture with Flynn Properties, a prior owner. The joint venture partners
repositioned the property so that the office layouts would appeal to a diverse tenant base, and the property has
since demonstrated a strong increase in occupancy over the past several years. The whole loan proceeds were used
to finance Genzon's purchase of Flynn's approximate 5% stake in the property. Genzon has a net worth of $2.34
billion.
• The transaction structure holds the borrower responsible for expenses that would typically result in shortfalls to the
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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
The risks we considered for this transaction include:
• The whole loan balance is highly leveraged, with a 95.8% S&P Global Ratings' LTV based on our valuation and the
$235.0 million whole loan balance. The LTV ratio based on the appraiser's valuation is 52.2%. Our long-term
sustainable value estimate is 45.5% lower than the appraiser's valuation.
• The mortgage loan is interest only for its entire five-year term, meaning there will be no scheduled amortization
during the loan term. Compared with an amortizing loan, an interest only loan bears a higher refinance risk because
of the higher loan balance at maturity. We used lower LTV thresholds at each rating category to account for the lack
of amortization.
• The transaction is concentrated by property type, sponsor, and geographic location. The collateral consists of one
loan secured by one office building located in San Francisco.
• During the five-year period between 2010 and 2014, the property experienced a low historical average occupancy of
about 77%, after one of its major tenants vacated nine full floors in 2010. Although a large portion of the space was
backfilled with only three floors left vacant, the property remained at a low level of occupancy before leasing up to
93% occupancy in 2015. However, the property has since been repositioned to attract diverse tenant types. In
addition, in determining a sustainable NCF level for the property, we applied a 10% vacancy rate, which is higher
than both current in-place vacancy at the property and average vacancy of the Financial District submarket.
• The property faces considerable tenant rollover risk, with 64.7% of the NRA rolling during the five-year loan term.
The largest concentration is in 2018, when 15 leases accounting for approximately 20.2% of the leased NRA and
21.8% of the in-place gross rent (as calculated by S&P Global Ratings) are scheduled to expire. Rollover is again
concentrated in 2021, when seven leases accounting for approximately 18.7% of the NRA and 20.4% of the in-place
gross rent, as calculated by S&P Global Ratings, are scheduled to expire. The diverse tenancy and strong location of
the property helps to mitigate this rollover risk. The loan's structure also requires ongoing reserves of close to $1.2
million per year to account for the upcoming rollover risk.
• The borrower is permitted to obtain future mezzanine debt, subject to a combined LTV ratio based on the
appraiser's valuation of no more than 52.0% and DSC ratio of no less than 2.20x based on the issuer's NCF.
However, the additional mezzanine debt would only be permitted if the combined credit metrics (including both the
mortgage and mezzanine loans) remain the same or improve upon the current mortgage loan metrics. Therefore, we
did not make an additional LTV adjustment across the capital structure to account for the permitted mezzanine
debt.
• The loan is structured with a hard lockbox and in-place cash management provisions that allow the borrower to
access funds before certain events occur, including an event of default or a deterioration in NOI. However, a cash
flow sweep prevents the borrower from accessing funds if the NOI generated by the property falls below 80% of the
NOI in place at closing. In addition, the current NOI calculated by S&P Global Ratings is about 8.3% lower than the
issuer's NOI.
225 Bush Street Loan Characteristics
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Mortgage loan
The 225 Bush Street loan has a $235.0 million whole mortgage loan balance. The loan is interest only for its entire
five-year term and has a 3.951% weighted average fixed interest rate. Of the $235.0 million whole mortgage loan
balance, a $100.0 million senior note A-1 is included in this securitization and references the pooled certificates. The
$22.0 million senior note A-2 ranks pari passu with the note A-1 but is not an asset of the trust (the senior companion
note).
The note B, referred to as the trust subordinate companion loan, is junior to the senior notes and references the
loan-specific certificates. Chart 3 shows the loan's structure.
The senior pari passu companion notes may be securitized in a future transaction(s).
The whole mortgage loan will be serviced and administered according to the trust and servicing agreement for this
securitization.
Secondary financing
The borrower is permitted to obtain future mezzanine debt, subject to a combined LTV ratio based on the appraiser's
valuation of no more than 52.0% and DSC ratio is at least 2.20x based on the issuer's NCF. However, the additional
mezzanine debt would only be permitted if the combined credit metrics (including both the mortgage and mezzanine
loans) remain the same or improve upon the current mortgage loan metrics. Therefore, we did not make an additional
LTV adjustment across the capital structure to account for the permitted mezzanine debt.
Borrower/sponsor
The borrower is 225 Bush Street Owners LLC, a single-purpose, single-asset entity.
The non-recourse carve-out guarantor under the 225 Bush Street whole loan is Kylli Inc., a California corporation and
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an indirect owner of the borrower. Per the loan agreement, the guarantor is required to maintain a minimum net worth
of $50.0 million.
Kylli is a wholly owned subsidiary of Genzon. Genzon is personally and wholly owned by Mr. Xueqin Deng. It was
formed in 2003 and is headquartered in Shenzhen, Guangzhou Province, China. According to information provided to
us by the loan seller, the majority of Mr. Deng's ventures are located in China.
Trade payables
Trade payables incurred in the ordinary course of operations are permitted up to 3.0% of the mortgage loan balance.
The loan agreement requires trade payables to be repaid within 60 days of the date billed.
Reserves
A summary of the reserves for the loan follows (see table 7).
Table 7
Reserves – 225 Bush Street
Taxes and insurance
premiums
$2.21 million upfront for taxes and $109,121 for insurance. On each payment date, an amount equal to 1/12 of the
estimated real estate taxes and insurance premiums payable in the ensuing 12 months shall be deposited.
Capital expenditures
None upfront. During a trigger period, the borrower shall deposit $11,987 monthly ($0.25 per sq.ft.).
TI/LC reserve
None upfront. Beginning September 2019, the borrower shall deposit $95,894 monthly. Lease termination fees will also
be deposited into this reserve.
TI/LC--Tenant improvements and leasing commission.
A trigger period means any period beginning when the NOI (as calculated under the related loan documents) for the
trailing 12-month period (as of the last day of any fiscal quarter) falls below $16.320 million and until the NOI is greater
than or equal to $16.320 million for two consecutive fiscal quarters based on the trailing 12-month period (as of the last
day of any fiscal quarter), or when the borrower fails to deliver quarterly or annual financial reports and ending when
such reports are delivered and they indicate that no other trigger period is ongoing.
Cash management
The borrower has established a lender-controlled lockbox account in its name. Tenants must deposit rents and other
revenues directly into the lockbox account. All funds in the lockbox account will be swept daily into the cash
management account, which is under the sole control and for the lender's benefit.
As long as there is no event of default or trigger period continuing, funds in the cash management account, after
paying debt service and reserves, will be swept daily into the borrower's operating account.
On each due date during a trigger period or, at the lender's discretion, during an event of default under the 225 Bush
Street loan, the related loan documents require that all amounts on deposit in the cash management account be used
to pay debt service, required reserves, and operating expenses, and that all remaining amounts be reserved in an
excess cash flow reserve account.
Insurance
We reviewed the loan's insurance provisions and providers and determined that they are generally consistent with our
property insurance criteria and normal market standards.
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The borrower must maintain comprehensive all-risk insurance, including windstorm, boiler and machinery,
commercial general liability, and terrorism insurance for the mortgaged property that at least equals the property's full
replacement cost. In addition, the borrower must have business interruption insurance covering the 18-month period
from the date of any casualty and containing an extended period of indemnity endorsement covering the 12-month
period commencing on the date on which the property has been restored.
225 Bush Street Property Characteristics
Collateral description
225 Bush Street is a 25-story office building comprising approximately 575,363 sq.ft. located in the North Financial
District submarket of San Francisco, one block north of the city's Market Street corridor. The property was developed
by John Rockefeller in 1922 as the headquarters for Standard Oil, and it was since expanded in 1950 to include a West
wing. More recently, the property was significantly renovated between 2010 and 2013, with about $12.8 million being
invested to refurbish both of the building's lobbies and its façade, as well as to replace the roof.
The property is currently about 93% occupied by 47 office tenants, with about 14% of the NRA leased to tenants that
are considered investment grade by S&P Global Ratings. These investment-grade-rated tenants include Target Corp.
('A'), which leases 20,677 sq. ft., and Benefit Cosmetics, which leases 61,917 sq. ft. Benefit Cosmetics is a subsidiary of
LVMH Moet Hennessy Louis Vuitton S.E. ('A+').
The property also includes a small portion of grade-level retail space, which accounts for about 5% of the total NRA.
Target Corp. is the property's major retail tenant.
Recent leasing activity at the property has also been strong following a low historical average occupancy of about 77%
between 2010 and 2013, after the property's largest tenant vacated nine full floors in 2010. Since that time, the
sponsors acquired the property in 2014 and repositioned about 90% of the office layouts to appeal to creative and tech
tenants, as these companies are driving much of the growth within the San Francisco CBD. The property's top two
tenants are Twitch, a subsidiary of Amazon that leases 84,035 sq. ft., and Benefit Cosmetics LLC, which leases 61,917
sq. ft.
Site visit details
The property is referred to as the old Standard Oil building and is a traditional office high-rise building with
distinguished design features and architecture. The property benefits from its location on the corner of Bush and
Sansome Streets, which are heavily trafficked, as they offer nearby access to a major highway. It consists of two
adjoining buildings, as it was originally built in 1920 and then expanded in 1950. The engineer leading the site tour
indicated that the building's exterior is not permitted to be altered because of the property's historic designation.
The property has 22 floors, the majority of which are built out as creative office spaces that offer an open floorplan.
Several of the floors that we visited are currently being leased to technology companies; these tenant layouts generally
contained shared workspaces and common meeting and entertainment areas.
The fourth floor is the only office floor that provides more of a traditional office layout. In addition, the third and 18th
floor corridors outside of the elevator banks seem representative of traditional office floors, but we were informed that
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these spaces could be re-built as necessary as part of future tenant improvements in order to appeal to tenants looking
for more of an open layout.
During the site tour we also observed the vacant space on the entire second floor. This space has been gutted and we
noted that the back area of the floor was dark and did not have any windows. We also observed the vacant space on a
portion of the third floor, which is move-in ready. Cable Vision vacated the space but has a lease in place through
2020, and is currently looking to sublease it.
The property also offers a lower-level parking garage, and amenities include a small gym located on the 13th floor.
Market summary
San Francisco is the approximately 10th largest office market in the U.S. by square footage according to CBRE Group
Inc. (CBRE), and has a total population of 1.91 million. Total employment stands at 1.20 million workers. The city's
unemployment rate is low, at about 3.4%, as compared to the 4.9% national average during the same period.
According to Cushman & Wakefield, the San Francisco office market continues to be fueled by the growth of its tech
sector. Over the past five years, San Francisco's total employment grew at a 4.0% average annual rate compared with
1.8% for the U.S. overall. The city has experienced steady employment growth, with 36,300 jobs added in the past
year, representing a year-over-year increase of about 3.5%.
Specifically, office employment comprised about 405,500 workers as of second-quarter 2016, representing a 4.6%
annual increase (6.3% over the past five years). CBRE forecasts office employment to continue to increase by about
1.0% per year for the next six years, though this expected growth rate will be lower than the long-term average of 1.9%
per year.
During first-quarter 2016, one new building totaling 450,000 sq.ft. came online in the San Francisco market, which will
be entirely occupied by LinkedIn. In addition, four buildings were completed in second-quarter 2016, all of which are
100% pre-leased. The completions included a 444,000-sq.-ft. building at 350 Mission Street in the South Financial
District, which is entirely occupied by Salesforce. In addition, there are several new projects underway, totaling about
3.8 million sq. ft., and much of this activity is focused in the South Financial District. Total net absorption within San
Francisco is forecasted to be 512,200 sq. ft. per year. However, supply is expected to outpace demand, with an
average 1.4 million sq. ft. per year.
According to CBRE, the average gross asking rent for the Financial District submarket is $54.96, with an overall
vacancy rate of 6.2%. Within the larger San Francisco market, the gross asking rent and vacancy rates are fairly in line,
at about $52.05, and 6.2%, respectively.
Competitive set
The appraiser did not identify directly competitive properties that are similar in terms of overall asking rents and
current occupancy; however, according to Cushman & Wakefield, base rents for competitive office leases generally
range from $64.00 per sq. ft. to $75.00 per sq. ft., with an average of $70.88 per sq. ft. The appraiser estimated the
subject's market rent to be about $71.34 per sq. ft. compared with the overall property's contract rent of $55.11 per sq.
ft. Therefore, the appraiser considers the building's in-place leases to be about 23% below market levels.
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Table 8
Competitive Office Leases Per Appraisal – 225 Bush Street
Property name
Year built
115 Sansome Street
1913
NRA (sq. ft.) Tenant name
Gross rent per sq. ft. ($)
126,716 M Moser Architects
72.00
Merchant's Exchange Building 1903
232,200 Confidential
64.00
Howard Hawthorne
1929
101,437 Campaign Monitor
74.00
111 Sutter Street
1926
275,017 Sequoia Benefits & Insurance Services
68.00
The Folger Coffee Building
1904
Monadnock Building
1906
204,625 Imprivata
75.00
Adam Grant Building
1908
191,055 Breather Products U.S. Inc.
69.00
300 Montgomery Street
1940
216,000 Fundbox
71.00
90,150 Integral Ad Science
74.00
NRA--Net rentable area.
Table 9 shows the appraiser's market rent estimate by tenant type.
Table 9
Appraisal Market Rental Rates(i) – 225 Bush Street
Floors
Rent ($ per sq. ft.)
Traditional office
64.00
Creative office (11-22)
74.00
Creative office (3-10)
70.00
Creative office (2)
68.00
Retail
75.00
(i)Information provided by the Sept. 20, 2016, Cushman & Wakefield appraisal.
Tenants
The property is approximately 93.0% leased to 47 different tenants, as calculated by S&P Global Ratings.
Twitch is the largest tenant in the building, occupying 84,035 sq. ft., or 14.6% of the total NRA on floors six, eight, and
nine. The office lease expires in August 2021. Founded in June 2011, Twitch is the world's leading social video
platform and community for gamers, video game culture, and the creative arts.
The second-largest tenant is Benefit Cosmetics LLC, a subsidiary of LVMH Moet Hennessy Louis Vuitton S.E. Benefit
Cosmetics occupies 61,917 sq. ft. (11.8%) on floors 20, 21, and 22 and contributes 7.0% of the gross rental income.
Benefit Cosmetics' lease expires in August 2020.
Table 10 shows a summary of the property's top tenants.
Table 10
Top Tenants – 225 Bush Street
Tenant
S&P Global Ratings'
credit rating
Occupied space
(sq. ft.)
% of collateral
NRA
% of S&P Global
Ratings' rent
Twitch
NR
84,035
14.6
15.1
59.04 Aug. 31, 2021
Benefit Cosmetics
LLC
A+
61,917
10.8
7.0
33.89 Aug. 31, 2020
Acxiom
NR
51,700
9.0
11.7
71.02 May 4, 2022
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Total rent per Lease
sq. ft. ($) expiration
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Table 10
Top Tenants – 225 Bush Street (cont.)
Tenant
S&P Global Ratings'
credit rating
Occupied space
(sq. ft.)
% of collateral
NRA
% of S&P Global
Ratings' rent
Total rent per Lease
sq. ft. ($) expiration
Lithium
Technologies Inc.
NR
50,886
8.9
8.8
54.02 Aug. 31, 2018
Nitro PDF Inc.
NR
26,975
4.7
4.2
49.75 Oct. 28, 2018
NR--Not rated.
Tenant rollover
The property faces considerable tenant rollover risk, with 64.7% of the NRA rolling during the five-year loan term. The
largest concentration is in 2018, when 15 leases accounting for approximately 20.2% of the leased NRA and 21.8% of
the in-place gross rent (as calculated by S&P Global Ratings) are scheduled to expire. Rollover is again concentrated in
2021, when seven leases accounting for approximately 18.7% of the NRA and 20.4% of the in-place gross rent, as
calculated by S&P Global Ratings, are scheduled to expire. The diverse tenancy and strong location of the property
helps to mitigate this rollover risk. The loan's structure also requires ongoing reserves of close to $1.2 million per year
to account for the upcoming rollover risk.
Table 10
Tenant Rollover
Year
No. of leases expiring(i)
NRA (sq. ft.)
% of NRA
% of S&P Global Ratings' in-place gross
rent
2016
0
0
0.0
0.0
2017
7
40,627
7.1
7.9
2018
15
116,149
20.2
21.8
2019
4
20,162
3.5
3.9
2020
11
88,277
15.3
12.7
2021
7
107,321
18.7
20.4
2022
10
98,479
17.1
23.0
2023
0
0
0.0
0.0
2024
1
26,320
4.6
5.2
2025
1
20,677
3.6
5.0
2026
0
0
0.0
0.0
0
0
0.0
0.0
24
17,225
3.0
0.0
2027 and beyond
MTM
Vacant
Total
N/A
40,126
7.0
N/A
80
575,363
100.0
100.0
(i)As calculated by S&P Global Ratings. Represents number of leased spaces identified in the rent roll, whether or not a given lease governs more
than one occupied space. MTM--Month to month storage tenants, representing about 3.0% of the property's NRA. NRA--Net rentable area. N/A –
Not applicable.
Capital expenditures
Between 2010 and 2014, the property received close to $13 million in capital improvements focused on refurbishment
of the building's two lobbies and its facade.
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Management agreement
The property is managed by 225 Bush Street Partners LLC, an affiliate of the borrower. Any management fees payable
to any property manager are subordinate to debt service payments due under the loan agreement. Per the in-place
agreement, the property management fees are 2.0% of gross revenues. In our analysis, we assumed a $1.0 million
management fee, which represents a market rate for the class and type of property.
The lender has the right to replace, or require the borrower to replace, the property manager with a property manager
selected by the borrower, subject to lender's sole discretion during an event of default under the 225 Bush Street loan
or following any foreclosure, conveyance in lieu of foreclosure or other similar transaction; during a material default by
the property manager under the management agreement (after the expiration of any applicable notice and/or cure
periods); if the property manager files for or is the subject of a petition in bankruptcy; or if a trustee or receiver is
appointed for the property manager's assets or the property manager makes an assignment for the benefit of its
creditors or is adjudicated insolvent.
225 Bush Street Historical Cash Flow And S&P Global Ratings' Cash Flow Notes
We reviewed the historical cash flows and the issuer cash flows to determine our view of a sustainable cash flow for
the property. We summarize the historical and S&P Global Ratings' NCF for the property below (see table 11).
Table 11
225 Bush Street Cash Flows
2012
Occupancy rate (%)
2013
2014
2015 2016 TTM
2017
budget
Issuer
S&P Global
Ratings
72.7
85.3
82.2
92.9
93.3
92.0
93.6
93.0
27.89
27.88
45.99
45.96
51.67
58.93
54.89
54.64
31,550,819
31,407,608(i)
11,656,324
13,674,008
21,727,448
24,528,502
27,707,523
31,160,256
(1,433,589)
(2,612,370)
(2,748,088)
(1,265,061)
(2,127,792)
(3,402,630)(ii)
1,335,569
593,498
1,323,217
1,895,336
3,023,025
2,211,260
2,472,155
2,618,690(iii)
361,900
322,880
592,677
557,108
520,622
518,448
520,622
471,038(iv)
74,225
436,101
520,688
539,404
596,767
161,454
596,767
523,240(v)
126,668
13,275
17,700
24,210
35,060
13,554,687
13,606,173
21,569,359
24,796,472
30,617,936
Real estate taxes
1,239,360
1,604,567
3,336,076
4,110,050
4,110,050
Property insurance
1,605,476
1,182,316
765,660
274,982
202,618
209,922
187,064
187,064(vii)
Utilities
1,742,433
1,288,867
1,895,260
1,687,814
1,776,457
2,002,957
1,776,457
1,776,457(viii)
837,702
1,740,914
2,557,729
2,861,587
2,944,836
1,411,597
2,944,836
2,944,836(viii)
216,717
384,715
614,952
824,430
1,017,981
1,000,000
1,000,000(ix)
1,143,969
804,580
1,084,425
1,110,926
1,059,944
1,059,944
1,059,944(viii)
Average rental rate ($)
Income ($)
Gross potential rent
Base rent
Less: vacancy loss
Expense reimbursement
Parking income
Other income
Contractual rent steps
Other rental revenue
Effective gross income
382,694
35,060
22,561(v)
34,051,418
33,430,325
31,640,507
4,361,617
4,361,617
4,361,617(vi)
Operating expenses ($)
Repairs and maintenance
Janitorial
Management fees
Payroll and benefits
1,037,871
1,382,419
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787,880
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Table 11
225 Bush Street Cash Flows (cont.)
2012
2013
2014
2017
budget
2015 2016 TTM
Issuer
S&P Global
Ratings
182,467
175,249
180,627(iv)
88,780
108,412(v)
11,593,947
11,618,957
Professional fees
368,821
393,103
General and
administrative
176,810
175,592
138,780
210,177
59,957
24,733
Total operating expenses
8,369,160
7,320,331
10,659,808
11,109,696
11,311,869
10,731,962
Net operating income
5,185,526
6,285,842
10,909,551
13,686,775
19,306,067
23,319,456
Other expenses
195,532
179,951
175,249
20,021,550
Leasing commissions
260,548
825,651(x)
Tenant improvements
260,548
1,255,491(xi)
Capital expenditures
97,812
201,174(xii)
Total capital items
NCF ($)
5,185,526
6,285,842
10,909,551
13,686,775
19,306,067
23,319,456
618,908
2,282,316
21,217,470
17,739,234
NCF haircut (%)
16.39
Capitalization rate (%)
7.25
Initial value ($)
244,679,093
Add to value ($)
710,848 (xiii)
S&P Global Ratings' value
($)
245,389,941
S&P Global Ratings' value
per sq. ft. ($)
427
NCF--Net cash flow. TTM--Trailing 12 months.
Cash flow notes
(i)Based on a gross-up of rents as of the August 2016 rent roll.
(ii)Based on an applied vacancy assumption of 10.0%. The vacancy was applied to the grossed-up rents and
reimbursements. This vacancy rate takes the property's historical occupancy performance into consideration and as a
result is higher than both the in-place vacancy of about 7.0% and the submarket vacancy of about 6.2%.
(iii)Based on a gross up of reimbursements as of the August 2016 rent roll.
(iv)Based on an average of 2012, 2013, 2014, 2015, and 2016 trailing 12-month expenses as of August.
(v)Based on an average of 2013, 2014, 2015, and trailing 12 months.
(vi)Based on current property taxes.
(vii)Based on current insurance.
(viii)Based on 2016 trailing 12 months.
(ix)Based on 4% of effective gross income.
(x)Calculated per table 12, based on 4% for new leases and 2% for lease renewals.
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(xi) Calculated per table 12, based on $26.00 for new office leases and $13.00 for renewal office leases, and $34.00 for
new retail leases and $17.00 for renewal retail leases.
(xii) Based on $0.35 per sq. ft.
(xiii) We added to the S&P Global Ratings' value $710,848, which is the present value of future rent steps associated
with investment-grade tenant leases (Target Corp. and Benefit Cosmetics).
To calculate TI costs as part of S&P Global Ratings' NCF for the major tenant types at the property, S&P Global
Ratings used the TI costs, renewal probabilities, and assumed lease terms listed in table 12.
Table 12
S&P Global Ratings' Leasing Costs – 225 Bush Street
Office
Retail
New TIs ($/sq. ft.)
26.00
34.00
Renewal TIs ($/sq. ft.)
13.00
17.00
65
65
7
8
Renewal probability (%)
Assumed lease term (years)
TIs--Tenant improvements.
Third-Party Reviews
We reviewed appraisal, environmental, and engineering reports for the two properties. In our view, neither property
had notable issues.
The seismic report for the 225 Bush loan revealed a probable maximum loss of 19% for the property.
Property Evaluation Details
During our property evaluations, we:
• Conducted site inspections of each of the subject properties.
• Analyzed and valued the properties, which included reviewing property-level operating statements, issuer-provided
data, and the borrowers' budgets.
• Reviewed management and sponsorship, which included meetings with on-site personnel and discussions with the
property manager; reviewed the third-party appraisal, environmental report, and engineering report for the
property; and reviewed the legal matters that we believe are relevant to our analysis, as outlined in our criteria.
Structural Issues
We reviewed the structural matters that we believed were relevant to our analysis for both the AMA Plaza and 225
Bush Street mortgage loans. This review included analysis of the major transaction documents, including the offering
circular, pooling and servicing agreement, and other relevant documents and opinions, to understand the transaction's
mechanics and its consistency with applicable criteria. We also conducted a structural review of the first-mortgage
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loan, co-lender and the cash management agreements.
Extraordinary trust expenses
The AMA Plaza and 225 Bush Street borrowers must pay special servicing, workout, and liquidation fees, as well as
costs and expenses incurred from any appraisals or inspections the special servicer may conduct for their respective
loans. In addition, the borrowers must pay default interest, which can be used to cover interest on all debt service
advances and advances that the servicer or trustee makes from enforcing the borrower's obligations under the loan
documents. Because S&P Global Ratings' credit ratings reflect, among other factors, timely interest payments on the
certificates, the borrowers' obligations to pay these trust fund expenses helps mitigate the risk of interest shortfalls
caused by a monetary or nonmonetary default.
Scenario Analysis
We performed several 'AAA' stress scenario analyses to determine how sensitive the certificates are to a downgrade
over the loan term.
Effect of declining NCF
A decline in NCF may constrain cash flows available for debt service. A decline in cash flows may occur due to falling
rental rates and 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 whereby the
NCFs from the 225 Bush Street and AMA Plaza properties decrease by 10%-40% from our current cash flows, which
are 16.4% and 11.8% lower than the issuer's underwritten NCFs, respectively. (See table 13 for the potential effect on
S&P Global Ratings' 'AA-' rating under these scenarios, holding constant S&P Global Ratings' capitalization rate for
each property.)
Table 13
Effect Of Declining NCF On S&P Global Ratings' Credit Ratings
Decline in S&P Global Ratings' NCF (%)
0.00
(10.00)
(20.00)
(30.00)
(40.00)
Potential 'AA-' rating migration for AMA Plaza
AA-
A-
BBB
BB
B+
Potential 'AA-' rating migration for 225 Bush Street
AA-
A-
BBB-
BB
B
NCF--Net cash flow.
Related Criteria And Research
Related Criteria
• U.S. Government Support In Structured Finance And Public Finance Ratings, Dec. 7, 2014
• Insurance Criteria For U.S. And Canadian CMBS Transactions, June 13, 2013
• Methodology And Assumptions: Assigning Ratings To Bonds In The U.S. Based On Escrowed Collateral, Nov. 30,
2012
• CMBS Global Property Evaluation Methodology, Sept. 5, 2012
• Rating Methodology And Assumptions For U.S. And Canadian CMBS, Sept. 5, 2012
• Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012
• Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
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• Assessing Borrower-Level Special-Purpose Entities In U.S. CMBS Pools: Methodology And Assumptions, Nov. 16,
2010
• Global Methodology For Rating Interest-Only Securities, April 15, 2010
• Understanding Standard & Poor's Rating Definitions, June 3, 2009
• Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006
Related Research
• Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors
On Credit Quality, July 2, 2014
• Industry Economic And Ratings Outlook: With Issuance Up And Delinquencies Down, CMBS Has Positive
Momentum Going Into 2014, Dec. 9, 2013
• U.S. And Canadian CMBS Diversity Adjustment Factor Matrices, Sept. 5, 2012
• Application Of CMBS Global Property Evaluation Methodology in U.S. And Canadian Transactions, Sept. 5, 2012
In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are
generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When
Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing
Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace
Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology
And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012;
"Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, 2009.
Analytical Team
Primary Credit Analyst:
John V Connorton III, New York (1) 212-438-3892; [email protected]
Secondary Contact:
James C Digney, New York (1) 212-438-1832; [email protected]
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