Crime wave cripples Michigan CMBS housing loan

A spate of assaults, robberies and other crimes that have raised safety concerns for residents living at the complex, near the neighboring Western Michigan University, contributing to a large appraisal reduction for the 256-unit multifamily property that is used in part for student housing.

A 21-year-old man was sentenced to at least 15 years behind bars earlier this month after pleading guilty to the murder of his girlfriend inside a Copper Beech townhome in Kalamazoo, Michigan in January.

The incident was among the most troubling of a spate of assaults, robberies and other crimes in the area that have raised safety concerns for residents living at the complex, near the neighboring Western Michigan University, contributing to a large appraisal reduction for the 256-unit multifamily property that is used in part for student housing.

“The servicer has made note of the robberies and vandalism in recent commentary… something that is being factored into future decisions on the workout strategy of this loan,” said Sean Barrie, a Trepp research associate, commenting on a report outlining the decline of the troubled loan.

CopperThe loan backing the 27-building, 110,527 sq ft Michigan property has been assigned an appraisal of just $16.9m, though the underlying collateral backs an original $30.45m note — part of Citigroup Commercial Mortgage Trust, Commercial Mortgage Pass-Through (CGCMT) Certificates, Series 2008-C7, according to data and research firm Trepp of October remittance data.

“Copper Beech is by far the WORST place I have ever lived,” noted one resident on apartmentratings.com, where only 9 percent of residents recommended the property. “I wouldn’t wish Copper on my worst enemy. Crime happens here every day, management doesn’t care about the tenants, and they try to charge you for things that you aren’t responsible for.”

Despite the ongoing troubles, the property has managed to maintain stable occupancy levels of around 85%, but the borrower has been “operating the buildings at a loss for last three years and was unable to generate enough revenue to cover monthly payments.” The loan was first shipped to special servicing in May due to imminent monetary default. It became delinquent  in June, and the collateral is currently in the process of foreclosure.

Student housing is already susceptible to volatile cash flows and oversupply concerns, and outdated housing faces competition from new product. Converting these properties into other uses is often difficult due to their specifically tailored layout, all of which could impair cash flows and lead to loan distress.

In addition, rising leverage on an increasing number of student housing CMBS has raised red flags about a potential spike in troubled loans as leverage creeps up amid the already vulnerable asset class, CMBS experts have noted.

“We do look at [student housing] in terms of having a higher default possibility compared to other multifamily property types,” Robert Vrchota, managing director CMBS group, Fitch Ratings, told Real Estate Capital earlier this year. “Where the leverage points are now, Fitch’s estimated stressed losses are higher for student housing loans versus traditional multi-family properties.”

Morningstar noted in a recent report that leverage on student-housing CMBS loans has risen over the past year, stating that “cash flow typically is more volatile than for conventional apartments, as student tenants are less likely to renew leases year after year. When cash flow falls so low that a loan is unable to cover debt obligations, these properties tend to fail swiftly.”

The CGCMT 2008-C7 certificates are collateralized by 72 mortgage loans ranging in size from less than 1% to 20% of the pool, with the top ten loans constituting 48% of the pool. Moody’s Investors Service in August affirmed the ratings on twelve classes and downgraded the rating on one class.

“The ratings on the P&I Classes A-1A through A-MA were affirmed because the transaction’s key metrics, including Moody’s loan-to-value (LTV) ratio, Moody’s stressed debt service coverage ratio (DSCR) and the transaction’s Herfindahl Index (Herf), are within acceptable ranges,” the Moody’s report stated. “The ratings on the P&I Classes A-J through H were affirmed because the ratings are consistent with Moody’s expected loss. The rating on the IO Class, Class X, was affirmed based on the credit performance of the referenced classes.”

But as of the July 11, 2014 distribution date, the transaction’s aggregate certificate balance had decreased by 34% to $1.22bn from $1.85bn at securitization. Moody’s assigned a weighted average conduit LTV of 102%.

As of August of this year, four loans constituting 5% of the pool were on the master servicer’s watchlist. Twenty loans had been liquidated from the pool, resulting in an aggregate realized loss of $126.4m. Eleven loans, constituting 22% of the pool, were in special servicing. Moody’s estimated an aggregate $68.2m loss for specially serviced loans.

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