DBRS Morningstar Assigns Provisional Ratings on J.P. Morgan Chase Commercial Mortgage Securities Trust 2022-ACB

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2022-ACB to be issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2022-ACB (JPMCC 2022-ACB):

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The JPMCC 2022-ACB single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in two Class A residential towers overlooking the East River in the Murray Hill neighborhood of New York. Despite the uncertainty around short- and medium-term demand for multifamily rental product in New York, DBRS Morningstar takes a positive view on the credit characteristics of the collateral, which has continued to exhibit strong leasing velocity and stabilizing concessions. The Midtown East submarket where the collateral is located has exhibited favorable vacancy and rent growth over the past decade, although rent growth has been relatively volatile. Between 2013 and 2019, the submarket experienced annual rent growth between -0.8% and 6.0%, and vacancy rates ranging from 1.9% to 3.2%. Midtown East has exhibited strong submarket characteristics because of its proximity to major transit centers, including Grand Central, and many large office properties that are well within walking distance.

The American Copper Buildings benefit from significant 421-a tax exemptions during the loan term and, in return, have designated approximately 21.0% of the units at the property as affordable. The market-rate units at the property are generally not subject to any restrictions on rental rates.

The property is in an irreplaceable location with close proximity to the East River as well as many attractions and demand drivers of Midtown East, including many office properties that house some of the city’s largest employers. Many units feature sweeping views of Midtown, the East River, Long Island City in Queens, and Greenpoint in Brooklyn. The property also benefits from convenient access and proximity to Grand Central, the 33rd Street subway station, and the East 34th Street ferry station. The surrounding neighborhood has long been a popular residential neighborhood in Manhattan’s Midtown. In addition to a significant number of high-end residential buildings, there are many popular restaurants and high-end retail offerings in the area.

The property benefits from an extensive, high-end amenity package that includes condominium-quality interior finishes and resort-quality common area amenities. Tenants have the option to sign up for a Copper Tone membership for full access to all amenities within the sky bridge, which includes a lap pool, a fitness center, a rock climbing wall, a yoga and Pilates studio, and spa facilities. Additional common area amenities outside of the Copper Tone membership include a rooftop infinity pool, an outdoor lounge, and a resident lounge. Additionally, the units feature floor-to-ceiling windows, stainless-steel appliances, stone countertops and backsplashes, Nest thermostat systems, and washers/dryers.

Borrower equity of approximately $204.3 million is being used to facilitate the acquisition of the collateral for $837.0 million. DBRS Morningstar views transactions more favorably when the sponsor contributes significant cash equity to an acquisition.

The property benefits from a substantial floor value based on its desirable location within Midtown Manhattan. The appraiser’s concluded land value was approximately $302.0 million, or approximately $396,846 per unit, which covers approximately 44.7% of the first-mortgage balance.

The property benefits from substantial property tax savings as a result of the long-term 421-a exemptions that have been in place since July 2018 and will end in June 2038. The abatement exempts 100% of the allowable assessed value, leaving only a minimal approximately $10.0 million of nonallowable value to be taxable. The 100% exemption remains in place for the first 12 years, with the exemption percentage declining every other year in 20% increments until the 20th year. According to the appraisal, in the 2021–22 tax year, the taxes due are estimated to be $1.2 million while the full tax liability would have been approximately $16.3 million. In return, the developer is required to satisfy certain conditions, including designating and maintaining a portion of the units as affordable housing.

The ongoing Coronavirus Disease (COVID-19) pandemic continues to pose challenges and risks to virtually all commercial real estate property types and has created an element of uncertainty around rental rates and future demand for multifamily rental product and the macroeconomy more generally. DBRS Morningstar believes some short- and medium-term softening in the multifamily market is likely, but the long-term fundamentals for multifamily properties in high-density urban areas remain favorable.

The DBRS Morningstar loan-to-value (LTV) ratio on the first mortgage debt is 102.67%, which is relatively high compared with other recently analyzed single-asset transactions collateralized by Class A multifamily properties, whose DBRS Morningstar LTV ratios range from 85.5% to 102.8%.

The property is indirectly encumbered by approximately $63.6 million in mezzanine debt, which represents approximately 9.4% of the total financing package. The all-in DBRS Morningstar LTV of 113.3%, inclusive of the mezzanine debt, is moderately higher than the secured debt LTV of 102.67%. While the mezzanine loan is not collateralized directly by any true assets (rather, it is collateralized by a pledge of 100% of the equity interest in the mortgage loan borrower), it is still a form of debt that must be serviced indirectly from property cash flow.

The property never stabilized prior to the coronavirus pandemic, even though the property was constructed in 2017 and, thus, there is limited operating history that exhibits a stabilized occupancy. The property’s leased rate peaked in February 2020 at approximately 92.5% and then fell precipitously during the pandemic, consistent with other comparable multifamily properties in Manhattan. The property did not return to a leased rate above pre-pandemic levels until June 2021. As a result, there is not yet a full year of stabilized historical performance.

The property has had to offer concessions in order to preserve occupancy as a result of the coronavirus pandemic, which amounted on average to one month of free rent from September 2021 to December 2021. The amount of concessions offered has remained elevated, even as the effects of the pandemic have subsided. As a result, DBRS Morningstar applied a concessions loss equivalent to one month on market-rate units in its cash flow analysis.

The borrower is a joint venture between Black Spruce Management (BSM) and The Orbach Group. BSM has completed the acquisition of 42 properties in four boroughs of New York City, including Manhattan, Brooklyn, Queens, and the Bronx, worth approximately $1.4 billion. The Orbach Group owns and manages a portfolio worth more than $1.5 billion and focuses primarily on affordable housing.

As previously mentioned, the property benefits from certain tax exemptions and regulatory agreements. If the borrower were to breach the regulatory agreements and/or is not in compliance with the requirements under Section 421-a, these benefits could be lost.

One of the borrowing entities is anticipated to enter into a "reverse exchange" under Section 1031 of the Internal Revenue Code. Within 10 business days of the loan origination, the entity will enter into a lease with a master tenant for its tenancy-in-common interest and the master tenant will become a borrower under the mortgage loan. Within 180 days of the origination date, the exchange must be completed, the lease will be collapsed and the master tenant will no longer be a borrower. The potential exists for the exchange to fail to take place, which would preclude any anticipated tax benefits.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (February 28, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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