A Multifamily Loan Underwritten in 2021 Now under Stress
Brush Factory Lofts Loan: A Case Study in CMBS Risk
This post features the Brush Factory Lofts loan, recently featured in Multifamily Dive for its delinquency, to illustrate how publicly available data can reveal crucial insights into CMBS loan performance. By examining the loan’s history and underlying factors, we can identify red flags that emerged long before the loan hit the headlines.
Uncovering the Loan’s Story
Information about the Brush Factory Lofts loan can be found in the DEUTSCHE MORTGAGE & ASSET RECEIVING CORP and Benchmark 2021-B30 Mortgage Trust prospectus from November 2021. This $795 million CMBS deal (BMARK 2021-B30) includes the Brush Factory Lofts loan as its ninth largest, with the following characteristics:
Loan Amount: $33 million
Loan-to-Value (LTV): 68%
Debt Service Coverage Ratio (DSCR): 1.3x
Debt Yield: 7.4%
The prospectus reveals that the property, having undergone a multifamily conversion, presented only one year of financial data (2020-2021), a period heavily impacted by the pandemic. This presented a challenge in accurately assessing the property’s financial health.
Observation #1: Optimistic Projections
While the property reported a 97.4% occupancy rate in September 2021, the actual Net Operating Income (NOI) of $1.76 million fell far short of the underwritten NOI of $2.4 million. This discrepancy warranted close examination, as achieving the underwritten NOI would require significant rent increases, relying heavily on the overall Philadelphia market to appreciate substantially.
Observation #2: Value-Add Project in a CMBS Deal
The borrower, Rufo Organization, is known for value-add residential projects. It’s unusual to find such projects within CMBS deals, which typically favor stabilized, income-producing assets. This suggests a potential mismatch between the loan and the CMBS structure, possibly driven by the easy credit environment at the time.
Observation #3: Limited Rent Growth Potential
Analysis of the property’s unit mix and market data indicated a small gap between the property’s rent and average market rent. This further emphasized the risk associated with relying on rent increases to achieve the projected NOI.
Observation #4: Borrower Risk and Property-Specific Issues
The prospectus also disclosed several risk factors:
Pending litigation involving a mechanic’s lien.
Three prior foreclosures involving the borrower sponsor within the past 10 years.
An IRS claim against the borrower sponsor.
Limited operating history for the property.
Loan Performance: A Story of Late Payments and Delinquency
Despite achieving the underwritten NOI of $2.4 million by the second half of 2023, the loan exhibited a pattern of late payments starting in January 2023. This culminated in delinquency in late 2023 and again in mid-2024, eventually leading to 90 day past due and special servicing in September 2024.
While the recent decline in rents in southwestern Philadelphia, where the property is located, certainly contributed to the loan’s distress, the warning signs were evident much earlier. The consistent late payments served as a crucial indicator of underlying issues.
Conclusion
The Brush Factory Lofts loan serves as a valuable case study for analysts. By diligently monitoring publicly available data, including loan performance and borrower history, potential warning signs can be identified early on. This proactive approach allows for a more informed assessment of risk and can potentially mitigate losses.
Want to learn more about analyzing CMBS data and identifying risk factors? Contact us at info@frescoanalytics.com.