in special servicing is in the tens of millions of dollars, backed by a deeply distressed asset.

On the other hand, the transfer of the Blackstone/EOP debt into special servicing bears out forecasts that the office sector will see more distress over time. In March, DAI reported that although office comprised the largest share of CMBS rated by

Fitch, the sector had the secondlowest percentage of loans in special servicing. However, Manus Clancy, managing director at New York Citybased Trepp, warned that "the trend is heading north."

And it will continue in that direction, Fitch said earlier this year, for the same reason that office, to date, has not seen as much distress as other sectors: it lags macroeconomic conditions. Call it a case oflast in, last out. Because of the long-term nature of office leases, cash flow holds up longer amid deteriorating fundamentals, conversely, rental declines and subsequent drops in NOI are often slower to rebound as markets begin to recover.

Moreover, Barry says, "Anything bought between 2006 and 2008, when the music stopped, proved to be purchased at increasingly unsustainable levels." Distress, therefore, becomes a likely byproduct, he adds.

That being said, another jumbo-sized 2007 Blackstone deal, its $26-billion acquisition of Hilton Worldwide, recently underwent a successful restructuring of its debt. In exchange for a reported $800 million in concessions to lenders, Blackstone extended the maturity on about $20 billion in debt until November 2015 and reduced its obligations by $4 billion.

Looking specifically at the Blackstone/EOP debt, New York City-based Fitch in late April cited the increased vacancy across the portfolio, along with a 10% decline in cash flow since the debt was issued, in downgrading three classes of CMBS in the trust and revising its outlook on three others from stable to negative. Similarly, Standard & Poor's said it may cut its ratings on two classes of the debt in the trust, known as GS Mortgage Securities Corp. II, 2007-EOP'

The ratings agency, also based in Manhattan, made the announcement a few days after the loan went into special servicing. "It is our understanding that the transfer resulted from concerns surrounding the borrower's ability to refinance the loan," according to S&P. Earlier this year, it had lowered its ratings on nine other classes, citing concerns similar to Fitch's about declining occupancy and net cash flows at the portfolio's

properties, "which caused an increase in our stressed loanto-value ratio."

The debt on the portfolio has been reduced over the past three years. The loan's current balance of $4.9 billion is about $2 billion smaller than when it was securitized. In addition, there are five mezzanine loans totaling about $2.3 billion, compared to approximately $4.5 billion in mezz debt at first.

BofA, the master servicer, recently extended the senior loan's maturity to February 2011, marking the second extension on a loan that was originally due to mature in 2009. One additional one-year extension option remains.

"At this time, the special servicer expects that the borrower will pay the special servicing fees and that the loan will remain current," according to S&P. The agency says it may take further rating actions or CreditWatch updates "as we learn more about the terms of the workout."

Although the largest concentration of properties in the portfolio is in San Francisco, the single biggest mortgage in the pool is on 1095 Ave. of the Americas, a one-million-square-foot office tower in Midtown Manhattan. Also known as the Verizon Building, the property represents 11 % of the balance. Feb. 21, the Verizon Building was approximately 82.6% leased, virtually flat compared to a year ago, says Fitch.

Other major assets in the portfolio include the 713,903-square-foot Metro Center Tower in San Francisco, and the 785,557-square-foot 60 State st. and the 646,800-square-foot 500 Boylston St. in Boston. Excluding the Verizon Building, the top 10 properties in the portfolio account for approximately 24% of the allocated loan amount, with no single property comprising more than 4% of the collateral, Fitch says.

As of Feb. 28, the average occupancy for the portfolio had declined to roughly 82.7%, compared to 91 % when the loan was issued. Additionally, Fitch says leases on approximately 40.4% of the leaseable area will expire through May 2012.

While massive, the portfolio covered by the GSMSC pool is a fraction of the 540 assets Blackstone bought from Chicago-based EOP. The private-equity giant began selling off the EOP portfolio almost immediately, disposing of about $21 billion of properties within a month of the EOP deal's February 2007 closing.

Some of those sales have become distressed-asset stories unto themselves. In New York City, Macklowe Properties bought eight of the nine Manhattan towers formerly controlled by EOP, putting $50 million of equity into a $7-billion transaction. When the credit markets froze, Macklowe was unable

to refinance the short-term debt on the properties, and all were taken back by Deutsche Bank, which has since sold each of them at a considerable discount on what Macklowe paid. The owner/ developer was also forced to sell its flagship General Motors Building at 767 Fifth Ave.

Morgan Stanley Real Estate paid $2.5 billion to buy seven of the EOP portfolio's San Francisco properties from Blackstone. Although it had remained current on the mortgages, late last year, it handed lenders the keys to five of those properties with a combined leaseable area of 1.3 million square feet.

In Southern California, Maguire Properties bought EOP's former assetsin Los Angeles and Orange County from Blackstone for nearly $2.9 billion. This past November, Bank of America sought to foreclose against Maguire over $1.7 million in missed payments on 2600 Michelson in Irvine, CA. Just as the Blackstone/EOP deal set records at the height of the market three years ago, so the delinquency of its remnants would register on the Richter scale today. Fitch said in May that although the Blackstone/EOP loan and a $2.7-billion borrowing by Beacon Capital to buy former EOP assets in Seattle and Washington, DC both remain current, the combined effect of the two loans defaulting would be a 400-basis point rise in the office delinquency level and an overall increase of 135 basis points in the overall delinquency rate.

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