NEW YORK–(BUSINESS WIRE)–Fitch Ratings upgrades the commercial mortgage special servicer rating of Rialto Capital Advisors, LLC (RCA) to ‘CSS2’ from ‘CSS2-‘.

The upgrade of RCA’s special servicer rating reflects Fitch’s assessment of the company’s servicing abilities, improved control environment, and continued investment in its technology platform relative to a significant increase in named CMBS special servicing. At March 31, 2014, the company was named on 30 CMBS transactions totaling $36.1 billion.

During 2013, RCA’s CMBS named special servicing portfolio increased substantially as Rialto named RCA special servicer on CMBS transactions in which its affiliates had control. Rialto continues to invest in CMBS 2.0 B-pieces having purchased 11 in 2013 and six through June 30, 2014.

The rating also reflects RCA’s experienced management team, asset management capabilities, and ability to leverage the infrastructure of its parent, Lennar Corporation. While Rialto provides ancillary income to Lennar, it is unclear if the company will remain of strategic importance in the long-run as Rialto has taken steps to establish itself as a standalone company, publishing its own financial statements and raising new capital in the form of senior unsecured notes.

RCA is the operating entity of Rialto that performs all servicing, special servicing, and asset management functions. Rialto provides investment management for its portfolios as well as third-party clients. Rialto manages two private equity funds, Rialto Real Estate Fund I & II, which target opportunistic investments in distressed loans and real estate and subordinate bonds in CMBS 2.0 transactions and expects to begin raising capital for a third fund beginning in the fourth quarter of 2014. Rialto also established a mezzanine platform through Rialto Mezzanine Partners Fund, LP and a separate mezzanine managed account for a global life insurance company and entered the commercial real estate (CRE) loan origination business to originate and securitize non-recourse CRE loans.

As of March 31, 2014, RCA was named special servicer on 2,134 CMBS loans totaling $36.1 billion in 30 transactions. As of the same date, RCA was actively working out four defaulted CMBS loans totaling $59.4 million and one REO asset with an unpaid principal balance (UPB) of $2.3 million. RCA is also named special servicer for 5,996 non-CMBS loans totaling $3 billion UPB and was actively working out 4,168 of the loans with a UPB of $1.7 billion, and 1,828 REO with a UPB of $1.3 billion. Approximately 69% of the non-CMBS loans special serviced by UPB are on undeveloped land or residential properties (84% by loan count).

In accordance with Fitch’s policy, an issuer appeal resulted in RCA providing additional information that ultimately led to a rating action different from the original rating committee outcome.

The servicer rating is based on the methodology described in Fitch’s reports ‘U.S. Commercial Mortgage Servicer Rating Criteria,’ dated Feb. 14, 2014, and ‘Rating Criteria for Structured Finance Servicers’ dated Jan. 30, 2014, available on Fitch’s web site www.fitchratings.com.

Additional information is available at ‘www.fitchratings.com‘.

Applicable Criteria and Related Research:

–‘Rating Criteria for U.S. Commercial Mortgage Servicers’ (Feb. 14, 2014);

–‘Rating Criteria for Structured Finance Servicers’ (Jan. 30, 2014).

Applicable Criteria and Related Research:

Rating Criteria for Structured Finance Servicers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=731750

Rating Criteria for U.S. Commercial Mortgage Servicers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735382

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842074

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Rialto Capital Management LLC Assigned ABOVE AVERAGE Commercial Special Servicing Ranking

Servicer Analysts:
Timothy E Steward, New York (1) 212-438-1000; timothy_steward@standardandpoors.com 
Mark I Goldberg, New York (1) 212-438-1000; mark_goldberg@standardandpoors.com
Andrew Foster, New York (1) 212-438-1000; andrew_foster@standardandpoors.com
OVERVIEW

• We assigned an overall ABOVE AVERAGE ranking to Rialto Capital Management LLC as a commercial loan special servicer. The outlook is stable.

• This is the first time we assigned a commercial servicer ranking to Rialto.
• We based our opinion on the company’s seasoned management team; effective technology, audit, and compliance controls; and well-defined loan and asset workout procedures.
NEW YORK (Standard & Poor’s) Jan. 4, 2013–Standard & Poor’s Ratings Services today assigned an ABOVE AVERAGE ranking to Rialto Capital Management LLC (Rialto) as a commercial loan special servicer. The outlook is stable for the special servicer ranking, and the company’s financial position is Sufficient.

Rialto is a leading real estate investment management company focused on distressed and value-add investments, asset management, workout, and turnaround strategies. The company is a wholly owned subsidiary of public homebuilder Lennar Corp., one of the nation’s largest homebuilders. Rialto was founded in 2007 by the former co-founders of what eventually became LNR Partners LLC. Since late 2009, Rialto has invested in or commenced the workout or oversight of billions of dollars of real estate assets, including distressed commercial and residential real estate loans and properties as well as mortgage backed securities. Rialto’s investments and management capabilities include partnerships in more than $3 billion in structured transactions with the Federal Deposit Insurance Corp. (FDIC). The company has also been a sub-advisor and investor in a $4 billion public private investment fund with the U.S. Department of the Treasury. In recent years, Rialto has been one of the most active CMBS B-piece buyers. The company plans to increase assets under management by continuing to invest in and manage CMBS and nonperforming loan portfolios. Rialto’s special servicing operation is headquartered in Miami, Fla.

This is the first time we have assigned a commercial servicer ranking to Rialto. In the relatively short time that the company has been in existence, it has made considerable progress building the infrastructure necessary to manage portfolios of sub-performing and nonperforming commercial and multifamily mortgage loans and real estate assets. The assigned ranking reflects what we consider to be Rialto’s seasoned management team, solid audit and control environment, and good loan workout and REO processes.

KEY RANKING FACTORS Strengths:

• Effective use of technology and systems

• Good audit, compliance, and control environment

• Seasoned management team with many years of industry experience
• Well-defined and effective loan workout and REO procedures and process flows
Weakness:
• The company does not have approved lists for some vendors and lacks a formal vendor performance monitoring process
As of June 30, 2012, the company actively managed a special servicing portfolio of 4,929 loans totaling $2.1 billion and 1,529 REO assets totaling $2 billion. Currently, Rialto concentrates on managing assets that it invests in and does not provide servicing for third parties. Rialto is the named special servicer on five CMBS transactions totaling 894 assets with a UPB of approximately $4.5 billion
OUTLOOK
The outlook for the commercial mortgage special servicer ranking is stable. Rialto projects reasonable volume growth over the near term and should benefit from continued investment in commercial real estate assets. Management has demonstrated its commitment to investing in staffing, systems, and other resources necessary to administer its portfolio in accordance with industry standards and to serve it clients and investors.
RELATED RESEARCH AND CRITERIA

• “Servicer Evaluations: Servicer Evaluation Ranking Criteria: U.S.,” Sept. 21, 2004

• “Revised Criteria For Including RMBS, CMBS, And ABS Servicers On Standard & Poor’s Select Servicer List,” April 16, 2009

• “Standard & Poor’s Comments On Potential Conflicts Of Interest Within Commercial Special Servicing Market,” March 9, 2012

• “Select Servicer List,” updated monthly

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