The industry trade group that controls the reporting standards for CMBS reporting, the CRE Finance Council, released the consensus version of the new reporting requirements for CMBS 2.0. The trade group spent over a year with investors, issuers and servicers trying to reach consensus on best practices and disclosure levels.
Standardized Annex A
The biggest part of the release is standardization of investor disclosures when initially selling CMBS bonds. In the past, each issuer would define what they would disclose in the initial prospectus, with the actual data fields being defined in Annex A to the prospectus. While there were plenty of similarities in the Annex A disclosures from one issuer to the next, they were not standardized. The new disclosures (see attached) made good progress on standardizing and requiring data disclosure related to:
1) The data needed to model the debt both within and outside the trust (the entire capital stack)
2) More details on historical operating statements (income and expenses)
3) Better data on escrows and reserves
Download pdf: CREFC Standardized Annex A – December 2010
CREFC also addressed standardization of the “typical” Reps and Warranties issuers make to bond investors, as well as the repurchase language/process the parties go through if there is a breach claim. Definitely an important step.
Effort Falls Short
In my view, despite the progress, the consensus disclosure standard falls short, specifically as it relates to disclosing the in place rent on the collateral (full rent rolls). Instead of agreeing to disclose this critical data, the “consensus” was to add information on two additional tenants so investors will now get information on the top 5 tenants in each property instead of just the top 3.
Instead of complying with Dodd-Frank and disclosing enough information to allow the investors/rating agencies to recreate their own underwriting models by disclosing the full rent roll, CREFC issued a 33-page “Principals Based Underwriting Template” in an effort to describe a “good” underwriting.
With all due respect, people in the business know how to underwrite, and a 33 page manual is a complete waste. Instead, the counterparties to the securitizations need the data to recreate an underwriting and make their own conclusions. Having an issuer state they “followed the manual” is nowhere near the same as disclosing the data to allow all parties to reach their own conclusions. The investors agreed and initially asked for full rent rolls but were not able to reach “consensus” on this issue so, instead, we are left with limited information on the “top 5.”
Active Few Weeks
I think the timing of these market standards indicates the “rules” from the SEC/regulators will soon be released. Later this week the regulators will release their conclusions on risk retention, and there is a rumor the SEC will be issuing its rules on Reg AB reform in the next few weeks/months. We will see if the regulators step up and require additional rent data or if CMBS 2.0 is really a lot more like CMBS 1.5.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.