Commercial Real Estate And Dodd-Frank Risk Retention Rules
The Dodd-Frank statute also led to the adoption of Regulation 15G of the Securities and Exchange Act of 1934 (15 U.S.C.A. § 78o-11), which requires the sponsor in a CMBS securitization to retain a 5% stake in the credit risk of the underlying commercial real estate asset. The purported purpose of the regulations is to require CMBS lenders to stay involved in the process and the transaction. The rules were finalized on October 22, 2014, but become effective for CMBS transactions on December 24, 2016.
Under the standard risk retention options, the sponsor must retain certain securities or find B-piece investors as follows.
- 5% of the face value of each class of securities issued in the CMBS transaction.
- 5% of the fair value of all CMBS securities issued, but only of the most subordinate class of securities.
- 5% of the value of transaction through a combination of either of the above options.
- An alternative option allows the sponsor to find up to two B-piece investors willing to assume the risk retention obligation of the sponsor, subject to certain restrictions.
The practical implications are additional transaction costs in complying with this statute. It could create more due diligence and a slower closing process for the commercial real estate lender.