Fitch Ratings: Environmental Factors Can Affect CMBS Large Loan Ratings
Fitch Ratings, New York, said a property’s environmental impact and sustainability may influence commercial mortgage-backed securities bond ratings in single-asset single-borrower and large-loan transactions.
The ratings firm’s recently published CMBS Large Loan Rating Criteria describes how environmental considerations are now explicitly analyzed as part of its collateral quality review.
“Our analysis of SASB and large-loan transactions has always considered collateral characteristics as a key rating driver,” the report said. “Fitch typically assesses the property quality, tenant rent roll, the sponsor, property management and the property’s location and market. These collateral characteristics inform [our] assessment of the amount and durability of property income, which in turn affect our leverage assumptions, including cap rates, constants and leverage hurdles, and therefore our view of a loan’s potential recovery and/or refinanceability.”
But Fitch now also considers the environmental impact and sustainability of a property when assessing its collateral characteristics. “For instance, transactions backed by Leadership and Environmental Design (LEED) certified properties are considered to have operational efficiencies by achieving lower operating costs through energy and water savings, and greater value durability with improved air quality, increased tenant desirability and better public image,” the report said. “A LEED certification would suggest a lower Fitch cap rate and constant compared with a nearby, non-LEED certified property, all else being equal.”
Because LEED-certified properties receive positive treatment in Fitch’s rating analysis, a SASB or large loan transaction backed by a LEED-certified property would also receive a higher Environmental, Social and Governance score, Fitch said. For example, Fitch mentioned One Vanderbilt in Manhattan (SLG Office Trust 2021-OVA) as an example of a transaction with an elevated Environmental, Social and Governance score due to positive ecological impact. “The transaction is secured by a newly developed trophy-quality office property located adjacent to Grand Central Station in Manhattan,” the report said. “The property was designed to achieve a LEED Gold and LEED Platinum Core & Shell Gold certification, which has a positive impact on the credit profile due to the effect on Fitch’s property quality grade and its attractiveness to tenants and buyers.”