Presale:
Chicago Skyscraper Trust 2017-SKY
This presale report is based on information as of March 14, 2017. 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
) *
Preliminary
amount ($)
LTV
(%)(ii)
Market value
decline
(%)(iii)
Debt yield
(%)(iv)
+ *
Class
Preliminary
rating(i)
$
A
AAA (sf)
506,628,000
45.0
66.7
15.5
),
X-CP
BBB- (sf)
807,227,000 (v)
N/A
N/A
N/A
$ X-NCP
BBB- (sf)
807,227,000 (v)
N/A
N/A
N/A
B
AA- (sf)
112,584,000
55.0
59.3
12.7
C
A- (sf)
84,438,000
62.5
53.7
11.2
D
BBB- (sf)
103,577,000
71.7
46.9
9.7
E
BB- (sf)
140,730,000
84.2
37.6
8.3
F
B+ (sf)
20,731,000 (vi)
86.0
36.3
8.1
HRR
B (sf)
51,312,000 (vi)
90.6
32.9
7.7
(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)Based on S&P Global Ratings' value. (iii)Reflects the approximate decline in the $1.52 billion
appraised as-is value that would be necessary to experience a principal loss at the given rating level.
(iv)Based on S&P Global Ratings' net cash flow. (v)Notional balance. The notional amount of the class
X-CP and X-NCP certificates will be equal to the aggregate certificate balance of the class A, class B,
class C, and class D certificates. (vi)The initial certificate balance of each of the class F and class HRR
certificates is subject to change based on final pricing of all certificates and the final determination of
the eligible horizontal residual interest that will be retained by a third-party purchaser in order for
Goldman Sachs Mortgage Co., as retaining sponsor, to satisfy its U.S. risk retention requirements.
OCM Credit Portfolio L.P. is expected to be the initial controlling class representative and the retaining
third-party purchaser of the class HRR certificates. LTV--Loan-to-value ratio, based on S&P Global
Ratings' values. N/A--Not applicable.
Primary Credit Analyst:
Christina Rossi, New York 212-438-2386; [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
March 30, 2017.
Collateral
A $1.02 billion trust mortgage loan, secured by a first lien on the borrower's fee
interest in Willis Tower, a class A, 110-story office building with a total of
approximately 3.8 million sq. ft., located in Chicago, within the West Loop
submarket.
Payment structure
On each distribution date, principal payments will be made sequentially: first
to class A and then to classes B, C, D, E, F, and HRR. The issuer will make
interest payments on the certificates: first to classes A, X-CP, and X-NCP, pro
rata, based on the interest due, and then sequentially to classes B, C, D, E, F,
and HRR. Realized losses are allocated in reverse sequential order starting with
the class HRR certificates.
Loan originators/loan
sellers
Goldman Sachs Mortgage Co., Bank of America N.A., and Citigroup Global
Markets Realty Corp.
Borrower
Six Delaware limited liability companies (BRE 312 Owner LLC, BRE 312
Broadcast LLC, BRE 312 Conference LLC, BRE 312 Restaurants LLC, BRE 312
Health Club LLC, and BRE 312 Skydeck LLC). Each company is a special
purpose entity that is indirectly owned and controlled by Blackstone Real
Estate Partners VII (Blackstone).
Master and special
servicer
Wells Fargo Bank N.A.
Trustee
Wilmington Trust N.A.
Certificate
administrator
Wells Fargo Bank N.A.
Rationale
The preliminary ratings assigned to Chicago Skyscraper Trust 2017-SKY's $1.02 billion commercial mortgage
pass-through certificates series 2017-SKY reflect S&P Global Ratings' view of the collateral's historic and projected
performance, the sponsor's and managers' experience, the trustee-provided liquidity, the loan's terms, and the
transaction's structure. We determined that the whole mortgage loan has a beginning and ending loan-to-value (LTV)
ratio of 90.6%, based on S&P Global Ratings' value.
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 exhibits the following strengths:
• The mortgage loan has strong debt service coverage (DSC) of 2.39x, calculated using the 2.45% spread over current
LIBOR and our in-place net cash flow (NCF) for the portfolio, which is 6.2% lower than the issuer's NCF.
• The property, originally known as the Sears Tower, is a trophy-quality class A office building with 3.8 million sq. ft.
and 110 stories, located in a primary central business district (CBD) in downtown Chicago. At 1,450 feet tall, it is the
tallest building in Chicago and the second tallest in the U.S., and it offers unobstructed views of the Chicago skyline
and Lake Michigan from several of its top office floors. It also features an observation deck and private venue space
with 50-mile views of the city, which continue to draw a growing number of tourists, reaching as many as 1.7 million
visitors in 2016. The property is also the premier broadcast site in Chicago, with several rooftop antennas and about
50,405 sq. ft. on its top floors dedicated to broadcast tenants. These unique building features contribute to the
property's overall revenue diversification.
• The property is expected to benefit from a two-and-a-half year capital plan by Blackstone, with about $546.1 million
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being invested to enhance the property's retail offerings, office suites, building amenities, and observation deck. The
project will include a full 313,204-sq.-ft. retail expansion and redevelopment on the property's lobby, mezzanine,
and lower levels. This will feature a newly constructed glass atrium to house the new retail spaces on the property's
first three levels and provide connectivity at the street level. The investment will also include significant upgrades to
the office spaces, featuring pre-built office suites, modernized building and elevator systems to allow for more
efficiency, and newly built tenant amenity floors, as well as a fitness center and a rooftop event space. The
remaining investment budget will be used to expand the observation deck from one to two floors. Once complete,
the upgraded observation deck is expected to draw 2.1 million visitors annually.
• The property benefits from Blackstone's experienced sponsorship. Blackstone is the world's largest private equity
real estate investment manager, with $102 billion of capital under management. Blackstone acquired the property
for $1.3 billion in 2015 at a historically low occupancy of about 73%, with plans to lease the property to market
levels through its planned capital investment. In addition, a portion of the mortgage loan is recourse to Blackstone,
as the sponsor is guaranteeing the funding of certain building costs under the capital plan. The construction
guarantee is subject to a cap of $171.2 million.
• The property is located within Chicago's West Loop, which is a dominant submarket in the downtown financial
district, given its proximity to most of the major commuter rail stations. According to Cushman and Wakefield, class
A properties located within this submarket tend to achieve rental rate premiums over comparable properties within
other downtown submarkets. The submarket has an average class A vacancy rate of about 10% and an average
asking rent of $42.98, as of third-quarter 2016.
• The transaction 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. 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 mortgage loan is highly leveraged, with a 90.6% LTV ratio, based on our valuation. The LTV ratio based on the
appraiser's valuation is 67.1%. Our long-term sustainable value estimate is 25.9% lower than the appraiser's
valuation.
• The mortgage loan is interest-only for its entire five-year extended 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 accounted for this by applying an LTV adjustment across
the capital structure.
• 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. We considered this concentration when assessing the
underlying property and the loan.
• The property's current occupancy of about 76.5% and average in-place gross office rent of about $37.32 per sq. ft.
both underperform the West Loop submarket, which has an overall occupancy rate of about 90% and average gross
office rent of about $42.98 per sq. ft., according to Cushman and Wakefield. In addition, the property had a
relatively low average occupancy of 84% over its past 20-year operating history. However, the property reached an
average occupancy of about 94% for the first 10 years of its past 20-year operating history, and it is undergoing a
$546.1 million capital plan in order to increase its occupancy and rent to be in line with market levels.
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• In determining a sustainable NCF and value for the property, we used an in-place analysis that does not deduct for
any temporary disruptions in revenue that the sponsor expects will occur as a result of carrying out the capital plan.
Specifically, the sponsor's budget anticipates that the existing $1.7 million in retail revenue and as much as a quarter
of the in-place observation deck revenue will be disrupted in 2017 while the build-out is being completed. However,
we considered that if we had deducted for this potential total revenue decline, the mortgage loan DSC would still be
2.16x, calculated using the 2.45% spread over LIBOR and our adjusted S&P Global Ratings' NCF for the property,
which was 15.2% lower than the issuer's underwritten NCF. In addition, the DSC when calculated using the 3.25%
LIBOR cap would still be 1.22x. Our in-place analysis also does not factor in any incremental revenue expected
upon stabilization as a result of the $546.1 million capital plan.
• The property's largest tenant, United Airlines ('BB-'), accounts for a significant concentration of office revenue,
contributing about 30% of the property's total office rent. In addition, United Airlines has an option to downsize its
space by up to one full floor beginning in March 2020. However, the tenant has had its headquarters at the property
since 2012 and its lease is in place through March 2028, which is about six years beyond the fully extended loan
term. In addition, the property faces limited overall rollover risk during the five-year extended loan term. The
maximum rollover in any given year is 5.4% of the leased net rentable area (NRA), and this occurs in 2018 when
8.0% of the in-place gross rent (as calculated by S&P Global Ratings) is scheduled to expire. The cumulative rollover
during the fully extended loan term is 15.5% of the NRA and 20.7% of the in-place gross rent.
• A portion of the rental income attributed to the property is from tenants that have not yet taken occupancy. Four
tenants with recently signed leases, accounting for about 10% of the property's total rental income, are scheduled to
begin paying rent between June and December 2017. We considered that if we had excluded these tenants from the
property's occupancy, the DSC when calculated using the 3.25% LIBOR cap and our adjusted S&P Global Rating'
NCF for the property would still be 1.18x.
• The borrower is permitted to obtain future mezzanine debt of up to $200 million subject to a combined LTV ratio
based on the appraiser's valuation of no more than 64.6%, DSC ratio of no less than 1.44x, calculated using the
3.25% interest rate cap, and debt yield of no less than 8.5% based on the issuer's NCF. A rating agency confirmation
(RAC) would also be required. Based on our calculations, 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. In addition, the mezzanine debt is only permitted if the sponsor substantially
completes the base building work associated with its construction guarantee under the capital plan. Because our
in-place analysis does not factor in any increases in revenue upon stabilization as a result of the capital plan, we did
not make an additional LTV adjustment across the capital structure to account for the permitted mezzanine debt.
• The transaction's loan bears interest at a floating rate indexed to one-month LIBOR. Increases in LIBOR will raise
the amount of interest payable on the underlying loan, which will decrease the loan's DSC. However, the loan has a
comparably short term (24 months plus extensions), which somewhat mitigates the risk of rising interest rates. In
addition, the loan is structured with a 3.25% LIBOR cap during the initial term plus extensions. The mortgage loan
balance has a DSC of 1.35x, when calculated using the 2.45% spread plus the 3.25% LIBOR cap and S&P Global
Ratings' NCF for the properties, which is 6.2% lower than the issuer's underwritten NCF. The interest rate cap
agreement is structured so that the interest rate cap counterparty can support ratings up to 'AAA' according to our
counterparty criteria. Therefore, our analysis did not include an additional interest rate stress.
• The loan's recourse guarantee for bankruptcy is limited to a guarantee by Blackstone for 15% of the loan amount.
However, the loan is fully recourse in the event of other "bad boy" acts such as fraud or gross negligence. Further, in
addition to these nonrecourse carve-outs, a portion of the mortgage loan is recourse to Blackstone, as the sponsor is
guaranteeing the funding of certain building costs under the capital plan. The borrower is also structured as a
special-purpose entity (SPE) with a nonconsolidation opinion and at least two independent directors.
• The borrower is not required to make any ongoing deposits into a tax and insurance, replacement, and leasing
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reserve unless a trigger event has occurred. However, the transaction structure includes a hard lockbox account for
cash management and an NCF sweep if the debt yield falls below 6.25% during the initial term, 7.0% during the first
extension term, and 8.5% thereafter.
• The transaction documents include provisions for the transaction parties to seek a RAC that certain actions would
not result in a downgrade or withdrawal of the ratings on the securities. These provisions include an option for the
transaction parties to deem their RAC request satisfied if the transaction parties do not receive a response to their
RAC request within a certain period of time. We believe it is possible for a situation to arise where an action subject
to a RAC request would cause us to downgrade the securities in accordance with our ratings methodology even
though a RAC request is deemed to be satisfied pursuant to this option.
Loan Characteristics
Mortgage loan
The first-mortgage loan has a $1.02 billion principal balance with an initial two-year term. The loan has a February
2019 initial scheduled maturity and three one-year extension options. The loan is interest-only for its entire term and
has an initial floating interest rate equal to one-month LIBOR plus a 2.45% spread.
In addition, the loan is structured with an interest rate cap. The borrower has entered into an interest rate cap
agreement with a 3.25% strike price (versus a current one-month LIBOR of 0.77%) during the initial loan term. Any
loan extensions are subject to the purchase of a new interest rate cap.
Secondary financing
The borrower is permitted to obtain future mezzanine debt of up to $200 million. The mezzanine debt, together with
the mortgage loan, will be subject to a combined LTV ratio based on the appraiser's valuation of no more than 64.6%,
DSC ratio of no less than 1.44x, calculated using the 3.25% interest rate cap, and debt yield of no less than 8.5% based
on the issuer's NCF. A RAC would also be required. In addition, the mezzanine debt is only permitted if the sponsor
substantially completes the base building work associated with its construction guarantee under the capital plan.
Borrowers/sponsor
The mortgage loan borrowers include six bankruptcy-remote SPEs that are indirectly owned and controlled by
Blackstone.
Blackstone Real Estate Group, which is part of The Blackstone Group, was established in 1991 and is the largest
private equity real estate investment manager in the world, with $102 billion of capital under management as of June
30, 2016. Blackstone has a total portfolio valued at over $200 billion, which includes properties across the U.S.,
Europe, Asia, and Latin America.
Blackstone purchased the Willis Tower property in 2015 for about $1.3 billion, and owns the asset within Blackstone
Real Estate Partners VII L.P., which is one of the largest closed-end real estate funds in the world, with $14.6 billion of
capital raised since inception. Blackstone's investments have also included the acquisition of 20 public real estate
companies, which have a combined transaction value of over $120 billion. In addition, the firm's current office portfolio
consists of 51 million sq. ft., with 35 million sq. ft. concentrated in California, New York City, and Chicago.
The organizational documents require the borrower to have two independent directors. Before the borrower decides to
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file for bankruptcy, the two independent directors must vote in favor of the decision. The independent directors must
be selected from nationally recognized companies or service providers that provide independent director services as
part of their business. The borrowers must provide three days of written notice before removing an independent
director.
The loan is nonrecourse; thus, repayment is not guaranteed by the sponsor or the guarantor. Nonetheless, the
transaction documents require a carve-out guarantee for certain "bad boy" acts, such as fraud, gross negligence, or
bankruptcy. However, the transaction is structured with a 15% cap on the recourse guarantee for bankruptcy.
Trade payables
Trade payables incurred in the ordinary course of operations are permitted up to 3% 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 transaction follows (see table 1).
Table 1
Reserves
Tax and insurance reserves
During a trigger period, tax and insurance funds equal to 1/12th of the annual taxes and insurance premiums
estimated to be payable with respect to the property during the next 12 months and 1/12th of taxes and
insurance premiums required to be paid at least 30 days before they come due.
Replacement reserve fund
During a trigger period, a monthly amount equal to $64,345, subject to a two-year cap.
Rollover reserves
During a trigger period, a monthly amount equal to $293,506, subject to a two-year cap.
Unfunded free rent and tenant
improvements
$68,723,097 upfront.
Cash management
The borrower has established a clearing account in its name for the lender's benefit. Tenants must deposit rents and
other revenues directly into the clearing account. As long as a trigger period has not occurred, all funds deposited into
the clearing account will be swept daily into a borrower-designated account. During a trigger period, all funds in the
clearing account are swept into the cash management account.
During an event of default, the lender may apply all funds in the deposit account at its sole discretion.
A trigger period will occur upon an event of default under the mortgage loan, or if the debt yield falls below 6.25%
during the initial term, 7.0% during the first extension term, and 8.5% thereafter.
On each monthly payment date during a trigger period, as long as an event of default has not occurred and is not
continuing, all funds on deposit in the cash management account will be used to pay the below in the following order:
•
•
•
•
•
•
•
Tax and insurance account;
Scheduled interest due;
Operating expense account;
Replacement reserve account;
Leasing reserve account;
Operating expense account;
Scheduled interest due on the mezzanine debt, if applicable; and
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• Excess cash flow account.
Insurance
We reviewed the transaction's insurance provisions and providers and determined that they are consistent with our
property insurance criteria and normal market standards. The borrower must maintain comprehensive all-risk
insurance for the property that at least equals the property's full replacement cost, except for earthquake and flood,
which may be provided with sublimits acceptable to the lender. The borrower must also maintain boiler and
machinery, commercial general liability, and terrorism insurance. Under the terms of the loan agreement, the
borrowers' deductible cannot exceed $250,000 per occurrence, except for any earthquake and windstorm coverage,
whereby the deductible cannot exceed 5% of the property's total insurable value. However, the loan agreement allows
the sponsor to provide the lender with a guarantee, subject to a RAC, for the earthquake and windstorm deductible up
to 15% of the total insurable value. The borrower's current policy has a $500 million earthquake limit. In addition, the
borrowers must have business interruption insurance covering the 24-month period from any casualty and up to 12
months after the property is restored.
Property Characteristics
Collateral description
Willis Tower is a 110-story, class A Chicago office building with 3.8 million sq. ft., located on the corner of Wacker
Drive and Adams Street, within the financial CBD in the West Loop submarket. Built in 1973, the property is the tallest
building in Chicago, featuring an observation deck with 50-mile views of the Chicago skyline on its 103rd floor.
The property contains 3,507,608 sq. ft. of office space, 313,204 sq. ft. of retail space (including the planned expansion),
50,405 sq. ft. of broadcasting space, and a 23,780-sq.-ft. observation deck component. The property's office and retail
space is currently about 76.5% leased, and the property also generates a significant portion of revenue through its
rooftop antennas and broadcasting towers. Broadcast users pay for access to the antennas, and then lease space on the
property's top floors to store transmitters and other equipment. The property also generates about a quarter of its
revenue from the observation deck, which has seen strong growth in attendance-based revenue since 2010.
Blackstone acquired the property in 2015 and has laid out a two-and-a-half year capital plan, over which it will be
investing about $546.1 million in order to transform the office, retail, and observation deck spaces by the beginning of
2019. The capital plan will focus on growing the property's retail segment, leasing the office space to reach market
levels, and expanding the observation deck.
The U.S. office sector overview
The property is located in Chicago, which is part of the Chicago-Naperville-Joliet Metropolitan Statistical Area (MSA).
Chicago is the third-largest office market tracked by CBRE Group Inc., with a total population of 9.8 million. Total
employment stands at 4.74 million workers. In June 2016, the city's unemployment rate was about 6.1%, which
exceeded the 4.9% national average during the same period. However, according to CBRE, Chicago's total annual
employment growth of 1.6% over the past five years was more closely in line with the 1.8% annual growth rate for the
U.S. overall.
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The Chicago MSA has the second-highest total office inventory nationally, behind New York, with over 227.9 million
sq. ft. of office space. Chicago's downtown office market CBD, which includes the property's West Loop submarket,
contains over 127.5 million sq. ft. across seven submarkets. The MSA's remaining 10 submarkets are primarily
suburban, and these contain about 100.4 million sq. ft. of inventory.
While economic growth has been weak in Chicago, the market has not experienced overall declines in office demand.
According to CBRE, office employment, which is the primary determinant of office demand, comprised 1.13 million
workers as of third-quarter 2016, representing a 0.7% annual increase. Office employment is expected to increase 1.1%
per year for the next six years. However, this growth will be lower than the long-term average of 1.7% per year, and
total net absorption is forecast to be 1.9 million sq. ft., which is expected to increase vacancy rates.
As of third-quarter 2016, the overall vacancy rate for Chicago's office market decreased 110 basis points over the
previous 12-month period to 14.6 percent, according to Cushman and Wakefield. This is a 520 basis point decline from
the prior peak vacancy of 19.8% in 2010. The vacancy decline as of third-quarter 2016 was mainly concentrated within
the CBD market, which saw a 190 basis point decrease in vacancy to a current rate of about 12%. In addition, as of
third-quarter 2016, the overall average asking rental rate in the CBD reached a 10-year peak of $35.95 per sq. ft.
Construction activity in the Chicago office market has declined substantially in recent years. In May 2015, the CBD
received 550,000 sq. ft. within the Fulton Market District submarket; this was the first delivery since 2010, when only
160,000 sq. ft. was delivered. However, in 2009, 3.7 million sq. ft. of inventory was delivered, which was the greatest
quantity in eight years.
About 3.5 million sq. ft. of inventory is under development within the West Loop submarket. The largest of these
projects is a new 35-story building with about 1.2 million sq. ft. of office space, located at 150 North Riverside Plaza,
and a 1.1 million-sq.-ft. development at 444 West Lake St., both scheduled to be completed in 2017. These properties
are between 50%-70% pre-leased. Outside of the West Loop submarket, a three-tower development is under
construction in the River North submarket, which will comprise office and apartment space.
Cushman and Wakefield reports that the West Loop submarket contains slightly over 44 million sq. ft. of office space
and has an average class A vacancy rate of about 10% and an average asking rent of $42.98 per sq. ft., as of the
third-quarter 2016. In addition, direct rental rates for class A space in the CBD are among the strongest in the River
North, West Loop, and Central Loop submarkets, with direct average rental rates at $44.97 per sq. ft., $42.98 per sq. ft.,
and $40.15 per sq. ft., respectively.
Triple net retail rents within the West Loop submarket average about $33.93 per sq. ft., and the average retail vacancy
is currently about 4.4%.
Competitive set
Table 2 shows the appraiser's rent and vacancy data for the property's competitors. The appraiser identified 10 directly
competitive properties that are similar in terms of building classification, location, age, rentable office area, and other
factors.
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Table 2
Directly Competitive Buildings
Property name
Office NRA (sq. ft.) (i)
% leased(i)
Gross rent per sq. ft. ($)(i)
311 South Wacker Drive
1,313,315
85.0
36.09-48.09
300 South Wacker Drive
563,638
94.1
39.31-41.31
200 South Wacker Drive
754,751
90.2
37.99-42.99
111 South Wacker Drive
1,213,322
98.0
50.84-54.09
71 South Wacker Drive
1,490,825
91.6
54.31-60.31
1 South Wacker Drive
1,195,170
87.0
39.46-41.46
1 North Wacker Drive
1,392,011
89.3
44.73-52.73
500 West Madison Street
1,448,095
89.2
39.97-43.97
500 West Monroe Street
1,223,268
88.9
33.60-40.60
The Franklin
2,514,702
93.6
34.19-51.19
Average
1,310,910
90.7
44.36
(i)Information provided by the Jan. 17, 2017, Cushman and Wakefield appraisal. NRA--Net rentable area.
According to Cushman & Wakefield, rents for competitive buildings generally range from $33.60 per sq. ft. to $60.31
per sq. ft. The appraiser estimated the subject's net market rent to be about $23.72 per sq. ft compared with the overall
property's net contract rent of $18.75 per sq. ft. Therefore, the appraiser considers the building's in-place leases to be
about 20% below market levels.
Table 3 shows the appraiser's market rent estimate by floor. The market rents for the retail spaces are associated with
the retail expansion and redevelopment that will take place as part of the sponsor's capital plan, which will include
313,204 sq. ft. of retail space. The new layout will feature numerous restaurants, a 53,750-sq.-ft. conference center, and
a 55,509-sq.-ft. entertainment center. The proposed fitness center is expected to contain 11,777 sq. ft. and will be
located on the lower level.
Table 3
Appraisal Market Rental Rates(i)
Floors
Net rent ($ per sq. ft.)
Grocery(ii)
40.00
Conference(ii)
35.00
Entertainment(ii)
40.00
Fitness(ii)
40.00
F&B Fast Casual – lower level 1(ii)
40.00
F&B Full Service - level 1(ii)
65.00
F&B Fast Casual - level 1(ii)
100.00
Retail street access – non-food(ii)
100.00
Retail second floor – non-food(ii)
60.00
F&B Full Service - level 2(ii)
40.00
F&B Fast Casual - level 2(ii)
60.00
Office 4-29
23.00
Office 33-47
24.00
Office 48-63
25.00
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Table 3
Appraisal Market Rental Rates(i) (cont.)
Floors
Net rent ($ per sq. ft.)
Office 66-89
27.00
Office 90-98
29.00
(i)Information provided by the Jan. 17, 2017, Cushman & Wakefield appraisal. (ii)Associated with the retail expansion and redevelopment that will
take place as part of the sponsor's capital plan, which will include 313,204 sq. ft. of retail space. The new layout will feature numerous restaurants,
a 53,750-sq.-ft. conference center, and a 55,509-sq.-ft. entertainment center. The proposed fitness center is expected to contain 11,777 sq. ft. and
will be located on the lower level. F&B--Food and beverage.
Tenants
The largest office tenant is United Airlines ('BB-'), which leases about 855,655 sq. ft. and contributes about 29.2% of the
property's total office rent. United Airlines has been at the property since 2010, and the company moved its
headquarters to the property in 2012, when it more than doubled its initial footprint. The tenant is in place through
2028, which is about six years beyond the fully extended five-year loan term.
Other top tenants include Willis Towers Watson ('BBB') and several of The American Lawyer's top 200 law firms,
including Schiff Hardin LLP and Seyfarth Shaw LLP, both of which are headquartered at the property. Several of the
top tenants at the property have termination options, but the majority of these go into effect after the fully extended
loan term.
The property also generates a smaller portion of its rental income from retail, broadcast, and antenna tenants.
Currently, 10 retail tenants are in place on a short-term basis, prior to the redevelopment taking place. In addition, the
property has several broadcast users that typically pay for access to the rooftop antennas and then lease space on the
property's upper floors to store transmitters and other equipment.
Table 4
Willis Tower Top Tenants
Tenant
S&P Global Ratings'
credit rating
Space
type
Occupied sq.
ft.
% of collateral
NRA
Gross rent per Lease
sq. ft. ($) expiration
United Airlines
BB-
Office
855,655
22.3
Schiff Hardin
NR
Office
208,409
5.5
40.98 Oct. 31, 2024
Seyfarth Shaw
NR
Office
191,736
5.0
44.39 June 30, 2032
Willis Towers Watson
BBB
Office
156,005
4.1
32.10 March 31, 2025
Dentons US LLP
NR
Office
125,852
3.3
39.13 Aug. 31, 2029
Tressler
NR
Office
84,408
2.2
39.49 Sept. 30, 2023
Segal McCambridge
NR
Office
79,921
2.1
37.53 Oct. 31, 2018
IMC Chicago
NR
Office
79.377
2.1
41.32 July 31, 2027
Marshall Gerstein
NR
Office
74,303
1.9
35.36 Feb. 28, 2021
Chicago Metropolitan
Agency
NR
Office
51,929
1.4
31.51 Aug. 31, 2020
Vacant
N/A
N/A
899,727
23.5
N/A N/A
Total
N/A
N/A
3,833,927
100.0
36.80 N/A
36.49 March 31, 2028
NRA--Net rentable area. NR--Not rated. N/A--Not applicable.
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Tenant rollover
The property faces limited tenant rollover risk during the five-year extended loan term. The maximum rollover in any
given year is 5.4% of the leased NRA, and this occurs in 2018 when 8.0% of the in-place gross rent (as calculated by
S&P Global Ratings) is scheduled to expire. The cumulative rollover during the fully extended loan term is 15.5% of the
NRA and 20.7% of the in-place gross rent. The loan's structure requires ongoing reserves of $1.00 per sq. ft. per year to
be funded monthly during a trigger period, subject to a two-year cap.
Table 5
Tenant Rollover
Year
No. of leases expiring
NRA (sq. ft.)
% of NRA
% of S&P Global Ratings' in-place rent
2017
2018
11
13,344
0.3
0.5
36
207,649
5.5
8.0
2019
2020
18
56,974
1.5
2.2
33
186,797
4.9
6.7
2021
24
128,279
3.3
3.4
2022(i)
38
96,096
2.5
4.0
2023
9
88,534
2.3
3.1
2024
23
315,591
8.2
11.5
2025
12
269,813
7.0
9.0
2026
2
53,894
1.4
2.0
2027
5
116,211
3.0
4.3
2028 and beyond
74
1,370,508
35.7
45.4
MTM
12
30,510
0.8
0.1
Vacant
139
899,727
23.5
N/A
Total
436
3,833,927
100.0
100.0
(i)All leases rolling in 2022 occur after the fully extended loan maturity. NRA--Net rentable area. MTM--Month to month. N/A--Not applicable.
Capital expenditure
Blackstone has laid out a two-and-a-half year capital investment plan, over which they will be investing about $546.1
million in order to transform the office, retail, and observation deck spaces by the beginning of 2019. Below is an
estimated completion timeframe and spending breakdown by segment.
Table 6
Capital Plan By Segment (in $000s)
Project
start
Estimated
completion
Retail
component
August
2016
Office
component
Observation
deck
$ spent $ spent during
prior to
initial loan
close
term
$ spent after
initial loan
term
Total
($)
241,190
25,255
278,397
57,852
133,289
56,559
247,700
0
20,000
0
20,000
69,804
394,479
81,814
546,097
Project length
(months)
Remaining
length (months)
May 2019
34
28
11,952
January
2016
December 2018
29
23
August
2016
May 2019
34
28
Total ($)
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Management agreement
Equity Office Management LLC, an affiliate of The Blackstone Group, manages the property. Its portfolio encompasses
over 50 million sq. ft. of class A office space across 350 buildings throughout the U.S.
The borrower's agreement with the property manager is in place until Dec. 31, 2018, subject to automatic one-month
renewals unless either party gives at least 30 days' notice of an intention to terminate the agreement. The management
fee is 1.0% of effective gross income (EGI) from the property, and there is also a separate construction management
fee of 2.5% of the total cost of construction associated with the property's capital projects. However, the maximum
management fee is 3% of the property's gross revenues, and it is subordinate to debt service payments in the cash
management waterfall. In our analysis, we assumed a management fee of 4.0% of the EGI, and we capped the total at
the greater of $1 million or 1.5% of the EGI, excluding the observation deck and antenna revenues.
The property has a separate management agreement associated with the observation deck component. The
management fee is 3.0% of gross observation deck revenues and is included as part of underwritten expenses
associated with the observation deck.
In the future, the borrower can elect to replace the property manager with an approved manager without the lender's
consent as long as no event of default has occurred. An approved manager is defined as a reputable and experienced
management organization that has at least five years of experience managing similar types of properties that total at
least 4 million sq. ft. The lender requires a RAC if the manager is not an approved manager.
Third-Party Reviews
We reviewed the appraisal, environmental, and engineering reports. In our view, the property did not have any notable
issues. Partner Engineering and Science Inc. prepared the Phase I environmental site assessment report for the
property and did not note any recognized environmental conditions. The property condition report, also prepared by
Partner Engineering and Science Inc., identified an estimated $8.5 million ($0.31 per sq. ft. per year) in estimated
replacement reserves for the property over the next seven years. In our analysis, we assumed $0.35 per sq. ft. per year
for ongoing capital expenditures.
Structural Issues
We reviewed the structural matters that we believed were relevant to our analysis. This review included analysis of the
major transaction documents, including the offering circular, trust and servicing agreement, and other relevant
documents and opinions, to understand the transaction's mechanics and its consistency with applicable criteria. We
also conducted a structural review of the first-mortgage loan and cash management agreements.
Extraordinary trust expenses
The borrowers must pay special servicing, workout, and liquidation fees, as well as costs and expenses incurred from
any appraisals or inspections the special servicer may conduct. In addition, the borrowers must pay interest on all debt
service advances and advances that the servicer or trustee makes from enforcing the borrowers' obligations under the
loan documents. Because S&P Global Ratings' credit ratings reflect, among other factors, timely interest payments on
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the certificates, the borrowers' obligation to pay these trust fund expenses helps mitigate the risk of interest shortfalls
caused by a monetary or nonmonetary default.
Historical Cash Flow And S&P Global Ratings' Cash Flow Notes
We reviewed the historical cash flows and the issuer- and appraiser-reported cash flows to determine our view of a
sustainable cash flow for the portfolio. We summarize the historical and S&P Global Ratings' NCF for the portfolio
below (see table 7).
Table 7
Historical Cash Flow
2013
2014
2015
2016
Budget
Underwritten
(as Underwritten
Appraisal
stabilized)
(as is)
S&P Global
Ratings
Income ($)
Gross potential
rent
108,570,036
Base rent
68,030,288
66,876,429
59,147,831
60,148,216
61,599,148
62,014,300
65,120,482
65,120,482(i)
Expense
reimbursement
36,029,295
35,980,678
35,302,413
41,427,296
39,468,157
42,045,970
49,721,266
44,174,028
44,174,028(ii)
Utility
reimbursement
1,871,118
1,819,077
1,459,957
1,381,200
796,286
1,200,000
1,381,200
1,381,200
1,381,200 (iii)
Overtime
HVAC
1,681,513
1,035,572
762,947
1,314,574
1,226,808
1,314,574
1,314,574
1,037,698(iv)
Tenant service
income
1,514,983
1,209,926
1,287,809
1,083,444
1,508,065
1,083,444
1,083,444
1,083,444 (iii)
Less: vacancy
loss
Parking
income
Other income
(16,434,118)
742,789
673,506
647,481
648,781
685,246
300,000
623,698
623,698
623,698(iii)
1,427,312
3,520,010
1,723,167
1,211,325
1,023,589
1,550,000
1,211,325
1,211,325
1,211,325(iii)
Credit loss
(488,213)
11,235
(22,557)
(28,768)
Antenna
income
9,309,910
9,590,229
9,544,272
9,431,281
10,034,702
11,500,000
9,431,281
9,431,281
9,431,281(iii)
27,530,363
28,726,527
31,826,229
35,552,848
27,441,787
27,000,000
45,244,604
35,552,848
33,689,539(v)
Step rent
credit
2,270,662
2,270,662
Branding and
advertising
2,500,000
Observation
deck revenues
Effective gross
income
(501,502)
147,649,359 149,443,188 141,679,548 152,145,414 143,783,788 145,108,768
206,918,271
162,163,841
157,752,993
Expenses ($)
Real estate
taxes
25,593,844
24,791,865
27,942,011
26,088,426
29,762,048
28,609,199
28,465,103
Property
insurance
5,035,352
5,141,408
4,460,002
4,093,002
4,290,185
4,319,243
4,319,244
3,964,948
3,964,948(vii)
Utilities
4,614,605
6,821,646
6,950,9978
6,181,617
5,772,875
4,879,011
5,290,692
6,181,617
6,181,617(iii)
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Table 7
Historical Cash Flow (cont.)
Repairs and
maintenance
9,282,376
9,050,394
9,289,688
9,954,945
10,284,634
10,585,185
10,759,622
9,954,945
9,954,945(iii)
Janitorial
5,079,163
5,447,696
5,765,731
5,235,862
5,842,498
5,716,820
6,718,434
5,235,862
5,235,862(iii)
825,610
800,143
1,204,517
1,093,116
1,017,239
1,491,281
1,000,000
1,000,000
1,719,483(ix)
Payroll and
benefits
4,407,076
4,440,162
4,585,236
4,113,339
4,172,456
4,403,583
5,085,674
4,113,339
4,113,339(iii)
General and
administrative
2,342,856
2,284,557
3,063,966
4,295,791
3,971,306
7,681,602
4,700,000
4,295,791
4,295,791(iii)
Other
expenses
8,126,665
4,957,086
2,874,296
3,351,845
1,494,035
1,245,000
5,029,480
3,351,845
3,351,845(iii)
Observation
deck expenses
3,858,734
4,266,725
4,848,219
5,653,023
7,627,226
8,000,000
10,368,555
5,653,023
5,250,621(v)
Total
operating
expenses
69,166,280
68,001,681
70,984,665
70,061,430
74,234,502
76,930,924
81,736,803
72,360,569
72,677,650
Net operating
income
78,483,079
81,441,507
70,694,883
82,083,984
69,549,286
68,177,844
125,181,467
89,803,271
85,075,343
Leasing
commissions
2,598,593
2,414,831
2,049,686(x)
Tenant
improvements
2,598,593
2,414,831
3,069,307(xi)
Capital
expenditures
1,142,071
1,142,071
1,341,874(xii)
118,842,210
83,831,538
78,614,475
Management
fees
Capital items ($)
Extraordinary capital expenditures
NCF (mil. $)
78,483,079
81,441,507
70,694,883
82,083,984
69,549,286
68,177,844
NCF margin
(%)
49.8
NCF haircut
(%)
(6.2)
Capitalization
rate (%)
7.0
S&P Global
Ratings' as-is
value ($)
1,123,063,935
Add to value
($)
2,775,545(xiii)
S&P Global
Ratings' final
value ($)
1,125,839,481
S&P Global
Ratings'
value/sq. ft. ($)
294
See cash flow notes section below table for full footnote references. NCF--Net cash flow.
Cash flow notes
• (i)Based on in-place rents as of the January 2017 rent roll plus upcoming rent steps for the next 12 months. Our
in-place rental income reflects an economic vacancy of 22.5%, which is higher than the West Loop submarket
vacancy of about 12.9% according to CoStar.
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•
•
•
•
•
•
•
•
•
•
(ii)Based on in-place reimbursements as of the January 2017 rent roll.
(iii)Based on 2016 expenses.
(iv)Based on an average of 2014, 2015, and 2016.
(v)Based on an average of 2015 and 2016.
(vi)Based on 2017 estimated taxes concluded in the appraisal.
(vii)Based on current property insurance.
(viii)Based on an average of 2013, 2014, 2015, and 2016.
(ix)Based on a 1.5% EGI floor, less antenna and observation deck expenses.
(x)Based on 4% for new leases and 2% for lease renewals.
(xi)Based on $23.00 for new office leases and $11.50 for renewal office leases; $4.00 for new retail leases and $2.00
for renewal retail leases; $35.50 for new broadcast leases; and $17.75 for renewal broadcast leases.
• (xii)Based on $0.35 per sq. ft.
• (xiii)We added to the S&P Global Ratings' value: the net present value of future rent steps of investment-grade-rated
tenants (total of $2,775,545).
Property Evaluation Details
During our property evaluation, we:
• Conducted a site inspection of the subject property;
• Analyzed and valued the property, which included reviewing property-level operating statements, issuer-provided
data, and the borrowers' budgets; and
• Reviewed management and sponsorship, which included meetings with on-site personnel; reviewed the third-party
appraisal, environmental reports, and engineering reports for the property; and reviewed the legal matters that we
believe are relevant to our analysis, as outlined in our criteria. We reviewed the current drafts of the major
transaction documents, including the loan agreement, offering circular, and trust and servicing agreement to verify
compliance with our criteria and to understand the mechanics of the underlying loan and the transaction.
Site Visit Details
We conducted a site visit of the property on Jan. 31, 2017, led by representatives of Blackstone and Equity Office
Properties, the building's property manager.
The property seems to benefit from its location on Wacker Drive, which is one of the major arteries in downtown
Chicago, located along the Chicago River's south and east banks. Tenants and visitors of the property have convenient
access to three of the four downtown commuter rail stations. The property has three entrances, including a separate
entrance for the observation deck on Jackson Street. Parking access is available on Franklin Street.
During the site tour, we discussed the retail redevelopment plan that will feature a glass atrium to house the new retail
tenants on the property's first three levels. Management indicated that leasing agents have already received multiple
bids on the planned retail spaces. In the interim, the property currently has 10 retail tenants in place on a short-term
basis, and management is also in the process of renegotiating some of these leases. These tenants would need to be
relocated following the redevelopment.
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The redevelopment will also feature a winter garden enclosure, which will be accessible through the Jackson Street
entrance. This amenity will provide dining options catered to visitors of the observation deck. Visitors will also have
access to a new entertainment area while waiting to enter the observation deck.
The planned expansion of the observation deck to two floors is expected to increase attendance by close to 500,000
annually. As part of the expansion, the sponsor has also proposed two new attractions, pending city approval. One of
these is a glass enclosed staircase on the property's exterior, referred to as a "ledge walk."
We also visited some of the tenant-occupied and vacant office spaces. Several of the spaces have contemporary
build-outs and offer impressive views of the Chicago skyline. While a significant amount of new office supply is
expected to become available in 2017 within the West Loop submarket, including two buildings with over 1 million sq.
ft. each, both of these properties will have fewer stories and therefore will not offer the types of views that several of
the tenants at Willis Tower benefit from.
We also took note of the high number of elevator transfers that were necessary to access several of the tenant floors.
However, this will be remedied as part of the elevator modernization plan, which will add eight new elevators and limit
elevator transfers to one. We also viewed the new tenant amenity spaces that are currently under construction on the
elevator transfer floors.
According to the building's representatives, the property's historically low occupancy level is partly attributed to the
previous owners' lack of capital investment and limited tenant improvement offerings. Under the current ownership,
building management is offering competitive tenant improvement packages. Management is also offering early
renewal options to existing office tenants if they renew before 2019, which is when rental premiums will be factored in
as a result of the building upgrades.
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 because of
falling rental rates and occupancy levels, changes to operating expenses, or other factors that may decrease a
property's net income. To analyze how a decline in cash flows would affect our ratings, we developed scenarios
whereby the NCF from the portfolio decreases by 10%-40% from our current cash flow, which is 6.2% lower than the
issuer's underwritten NCF. (See table 8 for the potential effect on our 'AAA' rating under these scenarios, holding
constant our 7.0% capitalization rate for the mortgage loan.)
Table 8
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 'AAA' rating migration
AAA
AA
A+
BBB+
BB+
NCF--Net cash flow.
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Transaction-Level Credit Enhancement
To determine a transaction's credit enhancement at each rating level, we use each loan's S&P Global Ratings' DSC and
LTV to calculate the stand-alone credit enhancement (SCE) and diversified credit enhancement. However, because
this transaction is secured by one loan, 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").
We considered that the mortgage loan collateral for this transaction will be interest-only for its entire term. To account
for this additional risk, we reduced the LTV thresholds by applying negative adjustment factors across all rating
categories. Below, we provide the LTV ratio and the implied market-value decline for each class (see table 9).
Table 9
S&P Global Ratings' LTVs And Implied Market-Value Declines
Class
Preliminary rating
LTV (%)
Implied market value decline (%)(i)
A
AAA (sf)
45.0
66.7
X-CP
BBB- (sf)
N/A
N/A
X-NCP
BBB- (sf)
N/A
N/A
B
AA- (sf)
55.0
59.3
C
A- (sf)
62.5
53.7
D
BBB- (sf)
71.7
46.9
E
BB- (sf)
84.2
37.6
F
B+ (sf)
86.0
36.3
HRR
B (sf)
90.6
32.9
(i)Reflects the decline in the $1.52 billion appraised value (as of Jan. 17, 2017) that would be necessary for a principal loss to be experienced at
each given rating level. LTV--Loan-to-value ratio. N/A--Not applicable.
Related Criteria And Research
Related Criteria
• General Criteria: U.S. Government Support In Structured Finance And Public Finance Ratings, Dec. 7, 2014
• Criteria - Structured Finance - CMBS: Insurance Criteria For U.S. And Canadian CMBS Transactions, June 13, 2013
• General Criteria: Methodology And Assumptions: Assigning Ratings To Bonds In The U.S. Based On Escrowed
Collateral, Nov. 30, 2012
• Criteria - Structured Finance - CMBS: CMBS Global Property Evaluation Methodology, Sept. 5, 2012
• Criteria - Structured Finance - CMBS: Rating Methodology And Assumptions For U.S. And Canadian CMBS, Sept. 5,
2012
• Criteria - Structured Finance - General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications,
July 12, 2012
• General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
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• Criteria - Structured Finance - CMBS: Assessing Borrower-Level Special-Purpose Entities In U.S. CMBS Pools:
Methodology And Assumptions, Nov. 16, 2010
• Criteria - Structured Finance - General: Global Methodology For Rating Interest-Only Securities, April 15, 2010
• General Criteria: Understanding Standard & Poor's Rating Definitions, June 3, 2009
• Criteria - Structured Finance - General: Standard & Poor's Revises Criteria Methodology For Servicer Risk
Assessment, May 28, 2009
• Legal Criteria: Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006
• Legal Criteria: U.S. Legal Criteria for "Recycled" Special-Purpose Entities, Sept. 19, 2002
Related Research
• Global Structured Finance Outlook 2017, Jan. 4, 2017
• Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors
On Credit Quality, July 2, 2014
• Industry Economic And Ratings Outlook: CMBS Performance Continues To Benefit From A Stable Economy And
Robust Capital Flows, June 9, 2014
• 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:
Christina Rossi, New York 212-438-2386; [email protected]
Secondary Contact:
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