OREANDA-NEWS. Fitch Ratings has affirmed C-III Asset Management LLC's (C-III) commercial mortgage primary and special servicer ratings at 'CPS2' and 'CSS1-', respectively.

C-III, which is wholly owned by C-III Capital Partners LLC (C3CP) and is indirectly controlled by Island Capital Group (Island Capital), performs special servicing primarily for legacy CMBS transactions, and primary servicing for third party and pre-securitization originations of third parties and C-III Commercial Mortgage LLC loans. C-III, through its affiliates, provides property management, brokerage, and title services to C-III as well as third parties.

The affirmation of the special servicer rating reflects C-III's strong management team, experienced and stable asset management group, commitment to developing and maintaining technology for asset management, extensive workout experience, and internal controls, as well as outsourcing of special servicing functions for a limited number of loans.

In the past 12 months, asset manager turnover was 18%, down from 27% at Fitch's prior review. Fitch calculated the number of C-III assets per asset manager to be 11 as of year-end 2015, consistent with the prior year and slightly below the industry average of the largest active special servicers.

Fitch also considered C-III's use of affiliates that provide asset dispositions, title reviews, property management, and brokerage services throughout the workout process with direction from C-III. C-III maintains detailed policies and procedures addressing internal conflicts of interest and the use of affiliates, and Fitch found the policies and procedures and transparent disclosure to be among the best of Fitch-rated servicers. In particular, the policies and procedures address the exchange of information between affiliates and businesses dealing with the sale of loans, fair value purchase options and potential refinancing.

Fitch found C- III to be transparent on the use of and fees paid to affiliates, which appear to be commercially reasonable and similar to those paid to non-affiliate companies.

C-III is an active purchaser of properties from legacy CMBS trusts through third party affiliates. Fitch believes C-III has been transparent with respect to its use of fair market value options, and in all instances either the master servicer or the trustee was required to confirm the purchase price partially mitigating potential conflicts of interest.

The three largest special servicers of legacy CMBS deals share the common challenge of shrinking portfolios. Since 2013, C-III's CMBS named special servicing portfolio has declined by 21% (by balance), and 122 of the company's 130 named CMBS transactions were securitized before 2008 and have significant maturities scheduled over the next 24 months. In addition to raising funds for purchasing control positions in CMBS transactions, C-III leverages asset management to provide due diligence and underwriting services to its own funds and client relationships.

For 2016 special servicer reviews, Fitch is focused on aged specially serviced loans, noting another consecutive year of increased aging. During its servicer reviews, analysts are discussing real estate owned (REO) assets with asset managers and senior management to better understand workout plans. Fitch questions the feasibility of certain long term workout plans given current market conditions, potential motivations for not disposing of assets, and historically higher losses on protracted resolutions, and will address its finding following its 2016 reviews. C-III's CMBS REO inventory has been held as REO for an average of 15.7 months, an increase from 12.7 months and 11 months as of year-end 2014 and 2013, respectively; however, C-III's REO hold time is less than the average of other legacy special servicers.

As of Dec. 31, 2015, C-III was named special servicer on 8,152 CMBS and 79 non-CMBS loans totaling $95.6 billion. As of the same date, C-III was actively working out 258 defaulted CMBS loans totaling $4.3 billion and managing 153 REO assets representing $2 billion. C-III owns the controlling class positions in the majority of CMBS transactions for which it is the special servicer.

The affirmation of the commercial primary servicer rating reflects the group's small but stable employee base, high degree of experience across management and staff, and the company's continued dedication to maintaining its primary servicing infrastructure. The rating also reflects the higher degree of key-man risk and limited bench strength in current primary servicing staffing levels.

Relative to similarly staffed primary servicers, C-III continues to maintain a strong internal control infrastructure, robust technology, and a core group of experienced staff necessary to perform primary functions effectively. Fitch will continue to monitor C-III's ability to effectively perform primary servicing functions in the context of portfolio size and staffing levels.

Since reaching $3.5 billion as of March 31, 2015, the total primary servicing portfolio has grown by 34% (by balance) to $4.7 billion. As of Dec. 31, 2015, C-III's primary servicing portfolio consisted of 210 loans totaling $4.7 billion; one loan amounting to $3.6 million was CMBS. The majority of the company's primary servicing includes warehouse servicing for a commercial mortgage originator, as well as the company's own originations pre-securitization.