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First CMBS to Comply With Risk Retention Rule Hits the Market

WASHINGTON, DC—Originators Morgan Stanley and Bank of America structured the deal to hold an eligible vertical interest, according to Kroll Bond Rating Agency.

By Erika Morphy | erikamorphy | | Updated on August 04, 2016
The Renaissance Dallas is backing one of the loans in the conduit. Photo by Marriott. The Renaissance Dallas is backing one of the loans in the conduit. Photo by Marriott.

WASHINGTON, DC—The long-awaited risk retention rule mandated under Dodd Frank is set to go into effect on Dec. 24, 2016, but the industry always knew that from a practical perspective deals would have to be compliant by mid-year. And so the first conduit that complies with the rule has hit the market and contrary to most expectations, it isn’t a capital market catastrophe in the making.

First, though, a quick look at why the commercial real estate market had been concerned about the rule.

The risk-retention requirement calls for CMBS loan originators to retain at least 5% of the credit risk using one of the following structures:

  1. an  eligible vertical interest, in which the sponsor retains 5% of the face value of each class of securities issued in the CMBS transaction.

  2. an eligible horizontal interest in which the sponsor retains 5% of the most subordinate class of the fair value of all of the CMBS issued.

  3. An L-shaped combination in which the retained interest consists of at least 5% of the value of the transaction held through a combination of the two aforementioned structures.

But how this would play out in an actual structure was unclear, especially as another big concern was how, or if, B piece buyers would be receptive to these new structures. The risk-retention rules also contain some challenging requirements for these investors as well.

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