CMBS credit concerns, in our experience, often fall into one of two categories: common themes related to aggressive underwriting (the principal agent problem) and idiosyncratic risks that are unique to a specific property and/or sponsor.
Credit issues related to aggressive underwriting stem from the principal agent problem – the fact that originators, as agents, transfer risk to the CMBS trust (and thereby bond investors) at issuance, instead of holding that risk for the loan term, as principals. Credit-negative stories we consistently work to avoid include: capital-constrained borrowers looking for maximum leverage for an otherwise-out-of-reach acquisition, cash-out refinancing for borrowers monetizing a property's cyclical peak net operating income (NOI) valued at today's historically low cap rates, and borrowers with histories of default that benefit from the credit amnesia of some CMBS lenders.
Idiosyncratic risks, on the other hand, represent credit concerns unique to a specific property and/or sponsor that are often uncorrelated with loan metrics and can be highly binary in nature. Unlike the more common themes of aggressive underwriting, idiosyncratic risks cannot be programmatically identified with credit overlays and are thus often underappreciated (or even overlooked) by cursory loan reviews and generic default-and-loss assumptions. In our experience, thoroughly reviewing the background of a transaction offers a helpful starting point for identifying what property and/or sponsor-specific risks might negatively impact the CMBS credit.
One of the more interesting idiosyncratic risks we've reviewed recently is foreign-ownership of properties tenanted by high-security federal agencies. Curiously, high-security federal agencies are often unaware that the space they occupy is foreign-owned because there is no established policy for documenting and disclosing building ownership to agency occupants.1 Despite increased scrutiny this year, the CMBS market financed two foreign purchases of properties tenanted by high-security federal agencies – a Department of Defense (DoD) Pentagon-annex in Arlington, VA and the headquarters of the National Aeronautics and Space Administration (NASA) in Washington, D.C.
In February, the Pentagon Center was sold to a newly created joint-venture that is 97.5%-owned by two sovereign wealth funds and 2.5%- owned by the domestic seller, which remained in place as the property manager. The CMBS market provided $210MM of acquisition financing, which was securitized across four conduit transactions.
Two Independence Square is a 605,897 square-foot Class A-office tower located just south of the National Mall and Capitol Building in the Southwest Washington, D.C. submarket. The area is home to a number of "mission-critical" GSA facilities, including the headquarters for over 12 federal agencies.12 Two Independence Square was built-to-suit for NASA in 1992 to serve as the national space program's headquarters, from which all administrative operations across the agency's field centers and facilities are organized. NASA, established in 1958, oversees all U.S. space exploration and is responsible for the civilian space program as well as aeronautics and aerospace research. Similar to the Pentagon Center property, Two Independence Square features Level IV security. The property also benefits from high-tech computer and conference rooms, recording studios, sound control, and an uninterruptible power supply (UPS) system to ensure continuous 24-hour operation. According to the building manager, everything can be done from the property short of operating an in-flight shuttle.13 In July, a domestic Real Estate Investment Trust (REIT) sold Two Independence Square to a foreign asset manager. To complete its purchase of NASA headquarters, the foreign asset manager created its own U.S. REIT sponsor, hired a domestic property manager, and borrowed $225.7MM from the CMBS market, which was securitized across a Single Asset Single Borrower (SASB) transaction and two conduits.
While the DoD Pentagon-annex property and NASA headquarters benefit from domestic property management and Level IV security, the ongoing concerns surrounding foreign-ownership of properties tenanted by high-security federal agencies represents idiosyncratic risk for the CMBS debt. In a worst-case scenario, if other risk-mitigation efforts are deemed insufficient, the high-security tenants might be able to negotiate a contraction and/or termination of their leased space. A significant reduction or elimination of leased space in the singletenant properties could destabilize the encumbered assets, risking a term default on the CMBS debt. Furthermore, heightened regulatory scrutiny related to foreign ownership of properties tenanted by high-security federal agencies (and nearby properties) might discourage or even disqualify foreign capital from participating in the market – representing a valuation headwind and a potential risk to recovery values.
Concerns related to foreign ownership of properties occupied by high-security federal agencies represents one example of idiosyncratic risk financed in the CMBS market. Importantly, identifying these unique credit issues requires asset-specific analysis beyond the scope of standardized credit overlays and generic default-and-loss assumptions. Performing this diligent asset-level analysis represents a fundamental part of our CMBS credit review process – and we believe the value added is worth the effort invested.


In each case, the speed and accuracy of the identification is critical to the success of the mission.
To meet these challenges, recent significant advancements in facial recognition technology have made it more efficient and accurate from much greater distances. Ultimately, the value proposition for facial recognition comes down to people, patterns and predictions, according to Benji Hutchinson, Senior Director for Washington, D.C. Operations at NEC Corporation of America.
In this exclusive executive briefing from @FedNewsRadio, experts from the Intelligence Advanced Research Projects Activity, U.S. Postal Service, Government Accountability Office, Homeland Security Department, Defense Department and NEC Corporation of America explore trends in facial recognition.
Download your copy today and learn why it's time to take a new look at facial recognition.
In early March of this year, President Trump released a revised version of a previously released Executive Order titled "Protecting the Nation from Foreign Terrorist Entry into the United States." Section 8 of this Executive Order directs the Department of Homeland Security (DHS) to expedite the completion of a biometric entry-exit tracking system. This new biometric enabled entry and exit vetting system poses a number of interesting challenges and opportunities for all stakeholders.
Every day, approximately 100,000 flights take off around the globe with over 3.7 billion passengers projected to fly in 2017. The U.S. accounts for almost a quarter of that air travel currently. Our federal policy, infrastructure, manpower and technology are currently aligned to facilitate vetting individuals as they enter the country, but the same alignment is not in place to vet individuals exiting our borders. This allows foreign nationals to overstay visas and continue to live in the U.S. illegally. Addressing this exit challenge requires concerted efforts to align policy (domestic and international), invest in new border infrastructure, and leverage the best of biometric technology to ensure accurate, efficient identity vetting.
Luckily, the state-of-the-art in biometric vetting technology has evolved significantly since lawmakers initially envisioned the biometric entry/exit system in the wake of 9/11. Gone are the days of cost prohibitive and complex biometric technology. Fingerprints have long been considered one of the gold standard modalities of biometrics. These technologies require travelers to stop and submit fingerprints when crossing borders, thereby limiting throughput.
The best solution for a modern biometric entry/exit system requires the stand-off, high-throughput, and extreme accuracy of facial recognition. U.S. Customs and Border Protection (CBP) has expressed an interest in a future where crossing borders leverages the security, convenience, and speed of frictionless authentication through facial recognition. NEC sees a similar world where travelers and passengers move seamlessly through transportation spaces such as airports. Their data are collected without contact so moving individuals do not need to stop to present fingerprints or a secure tokens such as a passport, border card, or driver's license.
Furthermore, facial recognition technology does not require a large footprint or major renovations to existing border infrastructure. Where there are infrastructure challenges at the borders and ports of entry, facial recognition can be installed with minimal disruption to travel patterns or the need for additional queues or checkpoints. Fast and effective, facial recognition also works at a distance which will minimize travel friction at high-traffic areas. Effective policy that synchronizes data from the Department of State, Department of Homeland Security, Department of Defense and various federal law enforcement agencies will create an iron-clad backbone for the U.S. government to know who is currently on U.S. soil.
The next 12 to 18 months will be an exciting time of rapid change for all stakeholders involved in protecting our borders. The deployment of an effective and efficient biometric entry/exit system will undoubtedly enhance the level of security and convenience for travelers crossing our borders. This system will also support the flow of commerce, free from security threats. These attributes will contribute to the safety, security, and wellbeing of our nation.
Contact us today if you like to learn more about how NEC's Advanced Recognition Systems can help your government agency.
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