Investment Analysis

Alternative Risk Retention for Commercial Real Estate

In response to input from the commercial real estate industry, the Dodd-Frank Wall Street Reform and Consumer Protection Act expressly contemplates flexibility and custom-tailoring for commercial mortgage-backed securities risk retention requirements. The contemplated regulations shall specify the permissible types, forms, and amounts of risk retention that would meet the requirements of the new rules. The proposed regulations may include:

(i) retention of a specified amount or percentage of the total credit risk of the asset;

(ii) retention of the first-loss position by a third-party purchaser that specifically negotiates for the purchase of such first-loss position, holds adequate financial resources to back losses, provides due diligence on all individual assets in the pool before the issuance of the asset-backed securities, and meets the same standards for risk retention as the federal banking agencies’ and Securities and Exchange Commission’s requirements;

(iii) a determination by the federal banking agencies and the SEC that the underwriting standards and controls for the asset are adequate; and

(iv) provision of adequate representations and warranties and related enforcement mechanisms.

Regulations under Dodd-Frank that incorporate items (ii) through (iv) would essentially be codification of existing practices with slight modifications, such as the requirement that first-loss position holders, under (ii) above, demonstrate certain financial wherewithal.

Michael Hamilton

Michael Hamilton, a partner in the Los Angeles office of law firm DLA Piper, focuses on finance and real estate matters. Contact him at michael.hamilton@dlapiper.com.For more on the Dodd-Frank financial reform act, read CIRE’s November/December 2010 Investment Analysis column, “Ready for Reform? Dodd-Frank requirements may put the squeeze on borrowers.”

Recommended

What’s Ahead in M&A

Spring 2022

In a frenzied environment of corporate mergers and acquisitions, commercial real estate will face tough decisions in the long and short terms. 

Read More

From Fairways to Forklifts

Winter 2022

Considering the growing demand for industrial real estate, golf courses are popular targets for conversion to warehouse and distribution centers. 

Read More

Big Data, Major Demand

Fall 2021

 Considering the continued growth of big tech, data centers will be a CRE sector to monitor. 

Read More

Return Policies

Summer 2021

Institutional investment and private equity look to reenter the commercial real estate game after staying on the sidelines during COVID-19. 

Read More