Fitch: Environmental Factors Now Weigh on Ratings for SASB CMBS

Single asset single borrower (SASB) and large loan commercial mortgage-backed securities (CMBS) bond ratings may be influenced by a property’s environmental impact and sustainability if these factors affect the property quality assessment, Fitch Ratings now says. The agency’s recently published CMBS Large Loan Rating Criteria describes how “environmental considerations are now explicitly analyzed as part of our collateral quality review.”

For example, Fitch says, transactions backed by Leadership in Energy 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. “A LEED certification would suggest a lower Fitch cap rate and constant compared with a nearby, non-LEED certified property, all else being equal,” according to Fitch.

Because LEED certified properties receive positive treatment in Fitch rating analysis, a SASB or large loan transaction backed by a LEED property would also receive a positive elevated Environmental, Social and Governance Relevance Score (ESG.RS) for Environmental: Waste and Hazardous Materials Management; Ecological Impacts.

SLG Office Trust 2021-OVA, the largest fixed-rate SASB deal to date at $3 billion, is an example of a transaction with an elevated ESG.RS due to positive ecological impact. The transaction is secured by SL Green Realty Corp.’s newly developed One Vanderbilt office property adjacent to Grand Central Terminal in Manhattan. 

“The property was designed to achieve a LEED Gold and LEED Platinum Core & Shell Gold certification, and this 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,” Fitch states. 

To date, only CMBS SASB transactions backed by LEED-certified properties have received elevated, positive ESG.RS. Fitch says there aren’t enough data available to properly assess environmental factors that may influence other types of CMBS transactions. 

“Monitoring environmental factors in multi-borrower transactions has been limited as the industry has yet to develop reporting standards for environmental factors such as emissions, energy usage and sustainability factors,” states Fitch. “The only Fitch-rated multi-borrower transactions that would have an elevated ESG.RS for environmental factors are those with exposure to environmental impacts as a result of weather and climate events such as storms or flooding.” 

At present, servicers on multi-borrower loans are able to report property damage, insurance coverage, insurance claims and recovery status and the impact on transaction performance, unlike other environmental data. “Fitch expects that as the industry develops and adopts reporting standards for other factors, such as climate change, emissions and energy usage data, environmental factors in multi-borrower transactions will be more transparent and easier to track.”