servicer evaluation: keybank real estate capital · servicer evaluation: keybank real estate...

Servicer Evaluation: KeyBank RealEstate CapitalServicer Analysts:Mark I Goldberg, New York (1) 212-438-7779; [email protected] Chamberlain, New York 212-438-3034; [email protected]

Table Of Contents

Opinion

Outlook

Company Profile

Management and Organization

CDO-CRE Special Servicing

Servicing Administration - Overview

Loan Administration – Primary Servicing

Loan Administration - Master Servicing

Loan Administration - Special Servicing

Financial Position

Contact Information

February 9, 2009

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Servicer Evaluation: KeyBank Real EstateCapital

Opinion

The rankings for commercial primary, master, and special servicing for KeyBank Real Estate Capital (KBREC) are

affirmed at STRONG.

KBREC continues to demonstrate sound and efficient servicing operations across all ranking categories and criteria.

KBREC acquired the primary and master servicing operations of ORIX in 2005 and integrated servicing operations

across two locations (Kansas City, Mo. and Dallas) during 2006 and 2007. However, current economic conditions

gave way to driving greater economies of scale from one location. As such, the company consolidated all servicing

activities in Kansas City. KBREC did, however, retain a small number of staff at the Dallas location, but relocated

some employees to Kansas City. Nevertheless, the company has maintained a tenured and experienced staff for all

servicing functions, a sound audit regime (including quality-control monitoring), and dedicated surveillance of

investor portfolios.

Outlook

Stable. KBREC has diverse lines of business, providing interim and long-term financing for a full array of investors

(CMBS, government-sponsored enterprises [GSEs], life companies, other third-party investors, and bank loans). The

company continues to focus on borrower and investor relationships and on maintaining superior portfolio

performance. The company has demonstrated commendable growth in its primary and master servicing portfolio

over the past several years, although it showed signs of run-off and reduced lending in 2008. Special servicing

activity increased during the first half of 2008 for both CMBS and non-CMBS problem assets, and, as is the case

with many of Standard & Poor's special servicers, KBREC anticipates increasing staff in special servicing during

2009.

Table 1

Servicing Portfolio

Jun-08 Dec-07 Dec-06 Dec-05 Dec-04

UPB(Mil.$)

Loans(No.)

UPB(Mil.$)

Loans(No.)

UPB(Mil.$)

Loans(No.)

UPB(Mil.$)

Loans(No.)

UPB(Mil.$)

Loans(No.)

Primary 123,490 11,511 134,440 11,475 95,407 11,331 54,711 7,525 31,935 5,056

Master (SBO*) 14,224 1,744 14,582 1,912 10,074 1,814 4,448 496 2,159 289

Total Servicing 137,714 13,255 149,022 13,387 105,481 13,145 59,159 8,021 34,094 5,345

Avg. Loan Size 10.4 11.1 8.0 7.4 6.4

SpecialServicing

262 10 7 2 43 7 14 5 149 15

Avg Asset Size 26 4 6 3 10

*SBO--Serviced by others.

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Company Profile

KBREC is a business unit of KeyBank USA N.A. (KeyBank), a wholly owned subsidiary of KeyCorp. The

organization provides financing for construction, permanent, bridge, and mezzanine commercial real estate loans

and services the full range of investors: capital markets (CMBS), institutional investors, pension funds, life

companies, banks, and GSEs. KBREC has more than 30 field origination offices, and servicing operations are based

in Kansas City.

Management and Organization

The ranking for management and organization is affirmed at STRONG.

Staffing Depth and Organizational Effectiveness

KBREC provides origination and servicing activities for all types of commercial real estate transactions from

construction and bridge financing to permanent loans across the entire capital stack, including mezzanine and equity

positions. The organization is broadly structured along three main branches: origination, servicing, and technology.

The servicing staff has strong backgrounds in commercial real estate as indicated by average years of experience at

the company and within the industry. Further, special servicing asset managers have 13 years average workout

experience and five years experience with KBREC.

Table 2

Industry Experience / Company Tenure*

Senior Managers Middle Managers Staff

Experience Tenure Experience Tenure Experience Tenure

Primary/Master 23 12 17 9 11 5

Special 19 11 29 4 5 4

*As of June 1, 2008.

Total servicing staff as of June 2008 totaled approximately 300 positions, which included a few staff located at the

Dallas servicing platform acquired from ORIX in fourth-quarter 2005. As mentioned, KBREC recently announced it

was reorganizing its overall operations, consolidating and reducing origination regional offices and the Dallas

servicing location in response to the downturn in the real estate and capital markets. However, certain selected

activities will be maintained in Dallas (and consolidated with an originations office in that city) that include

servicing of the Government National Mortgage Assn. (Ginnie Mae) and HUD/Federal Housing Administration

portfolios, a portion of the IT staff, and business development activities. The Dallas staffing reductions took place

during the second half of 2008 in a phased approach that was well-planned and effectively managed with internal

control testing to ensure there was no disruption to customers or servicing activities.

Marty O'Connor heads the KeyBank and KBREC's Real Estate Servicing & Support Group, which includes

origination risk management, compliance, servicing, and technology associated with the commercial real estate

business. Bryan Nitcher, reporting to Marty O'Connor, heads the Loan Servicing and Asset Management/Special

Servicing operations.



Servicer Evaluation: KeyBank Real Estate Capital

The account management section handles new loan setups and conversions, while investor reporting and operations

covers all recurring daily activities (payments, disbursements, and remittance).

Training

Training and compliance has been recentralized to Kansas City from its previous dual location delivery between

Kansas City and Dallas.

• Targeted annual training time of 40 hours was ahead of schedule with 26 hours completed as of June 2008.

• An on-the-job mentoring program and external education courses supplement formal classroom courses.

• Training classes include presentations and discussions by internal and external subject matter experts, including

attorneys, appraisers, building inspectors, engineers, and senior staff.

• KeyCorp's human resource and central training departments provided strong support and assistance in the

development of formal programs, which resulted in a uniform and integrated curriculum.

• KBREC enhanced and replaced its previous web-based training (Training Employee Development System-TEDS)

with a new web-based application–My Learning Center–that continues to provide access to schedules, courses,

and computer-based training modules, facilitate online registration, managerial approval, and tracking of

completed programs and is more specific to each employee's job function and requirements.

• "Hot Topic" one-hour sessions provide an informal setting for discussions about current issues, procedures, and

regulations, including postmortem case reviews, from department managers and subject matter experts (SMEs).

• Completed programs are incorporated as part of employee annual performance reviews, including

recommendations for the succeeding year.

• Overall, KBREC's structure and staffing has been well-managed with appropriate experience levels, training, and

education. KBREC has its own homepage on the corporation's KeyNet intranet site, RECWeb, which provides




new employee guides, curriculum-based positions, a training library, and other documentation regarding training

requirements.

Technology

A proprietary and extensive data warehouse application ensures a well-automated and integrated data management

operation and reporting capabilities, and supplements the Strategy servicing system. KBREC adopted the best

features of two platforms (KBREC and ORIX) and staff to support the company's overall goals of sound asset and

corporate risk management and exemplary customer service.

RECWeb, KBREC's intranet, orchestrates all loan information from the data warehouse and is used for workflow

tasking and timeline tracking. KBREC increased the internal IT department and support staff and hardware capacity

to handle the growing business volume.

• The servicing system is interfaced with the origination and general ledger systems.

• Document imaging is extensively utilized and integrated.

• IT staff provide application training and system security monitoring.

• Borrower and investor Web sites are easily navigated with thorough content.

• Task and timeline tracking actions are logic-driven and provide email alerts based on company-set standards for

individual activities and borrower request type.

• REO accounting is maintained on a spreadsheet/operating statement analysis report (OSAR) application, which is

integrated with the servicing system to support investor reporting.

• A construction loan budget module in RECWeb supports the construction loan business segment.

• Daily system backups are appropriately maintained off-site through the parent bank's data centers in Cleveland,

Ohio, and Albany, N.Y.

• The reciprocal Kansas City and Dallas sites provide disaster recovery and business resumption, along with

availability and increased use of remote (VPN) system sign-on.

• Full disaster and business recovery plans are tested annually, and the bank tests the VPN network monthly.

• Recovery procedures contain calling trees, locations, vendors, and process scripts for the recovery teams.

KBREC continues to use technology as a main foundation supporting its goals of borrower satisfaction, sound

investor reporting, and sound operational internal controls. KBREC's suite of applications provides full loan-level

datasets capable of supporting all asset management, special servicing, investor reporting, and Web site needs.

Numerous enhancements have been implemented over the past two years including: email notification of key event

timelines, real-time dashboard to monitor operations and summary loan level information and trends, improved tax

and insurance monitoring, construction budgets, and draw tracking and property-location mapping.

Internal controls

Policy and procedure manuals are well-written, online, and well-documented. There are two sets of three manuals

each. Three manuals separately document KBREC's policies for each of the primary, master, and special servicing

functions, and the second set of three manuals provides the procedures to accomplish each of the activities within

primary, master, and special servicing.

• The manuals include indices, glossaries, and hyperlinks to various forms and exhibits.

• Pooling and servicing agreement (PSA) abstracts, which undergo legal review, are also maintained online for

reference.

• Updates are handled through a committee process, senior managers approve any changes, and many areas of the




manuals were reviewed and updated during 2008.

• The manuals are used in staff training sessions to ensure understanding and compliance.

• KeyCorp's audit department performs operational internal audits and the internal KBREC compliance

department handles file sampling and procedure monitoring for compliance reviews covering all areas of

servicing.

• The 2007 audit was rated highly effective in internal risk management and compliance to policies and procedures

with a few areas noted for re-review such as interest reserve analysis and loan risk ratings to ensure controls are

appropriately monitored and in place due to deterioration in the general economy and real estate in particular.

• Ernst & Young performed USAP, Reg. AB, and SAS70 audits, and it found KBREC to be in compliance with all

requirements.

• KBREC has a separate in-house quality control department that is responsible for compliance testing,

securitization due diligence, and third-party contracting.

In addition, all servicing policies have been risk-rated, which determines the frequency the internal compliance area

performs the respective sampling and reviews as part of its internal program, along with a quarterly line-of-business

self-assessment monitored by KeyCorp.

Additional items

The company has no material lawsuits outstanding and maintains appropriate corporate insurance policies.

CDO-CRE Special Servicing

KBREC also qualifies as a CRE-CDO special servicer. This qualification is based on the company's record in

underwriting and managing investments in commercial real estate, as well as its acceptable tracking and accounting

systems for construction and permanent loans, investments, and property administration, together with sound

internal controls and audits.

KBREC's origination activities, broad markets, and strong surveillance encompass the necessary elements for

addressing ramp-up and replacement periods associated with CRE-CDO structures, along with monthly trustee and

quarterly collateral manager reporting requirements. Appropriate committee structures, as in CMBS special

servicing, monitor and make decisions relative to workout plans.

Servicing Administration - Overview

Servicing for KBREC has been recentralized to Kansas City and servicing volumes and staffing has remained

relatively constant since 2006. As of June 2008, KBREC was the primary and master servicer on 85 securitizations

($85.5 billion), and a sub-servicer for another 50 securitizations ($7.2 billion), and as a special servicer on 17

transactions.

Loan Administration – Primary Servicing

The ranking for loan administration primary servicing is affirmed at STRONG. KBREC has an efficient primary

servicing function based on a combination of factors including; strong internal controls, generally large loan sizes,

and complex transaction structures, and response time to borrower requests. The portfolio contains a mix of




collateral types, with approximately 60% distributed between retail, multifamily, and office based on UPB.

Delinquency percentages have increased from prior years, but are still generally low. Geographic diversity is good.

The company's portfolio includes properties in all 50 states, with the highest concentrations in California, New

York, Texas, and Florida. Servicing operations are performed in both a portfolio-driven and functional approach.

Each borrower is assigned to an account manager, who provides a single point of contact for all issues and

questions.

Table 3

Primary Servicing Portfolio


UPB (Mil.$) Loans(No.)


UPB(Mil.$)

Loans(No.)

UPB(Mil.$)

Loans(No.)

UPB(Mil.$)

Loans(No.)

PrimaryServicing

123,490 11,511 134,440 11,475 95,407 11,331 54,711 7,525 31,935 5,056

Average LoanSize

10.7 11.7 8.4 7.3 6.3

Delinquency %

30 Days 0.07 0.10 0.17 0.34 0.32 0.47 0.27 0.27 0.15 0.69

60 Days 0.13 0.11 0.09 0.14 0.06 0.11 0.07 0.11 0.17 0.26

90+Days 0.80 0.63 0.15 0.31 0.29 0.41 0.12 0.35 0.34 0.71

Total 1.00 0.85 0.40 0.79 0.68 0.99 0.45 0.72 0.66 1.66

New Loan Setup and Data Integrity

New loan setup (NLSU) is handled as a team effort between originations and servicing specialists within the Account

Management area for various data and document processes, including the borrower loan record information, taxes,

insurance, and collateral documentation.

• Enhanced systems interface between originations, as well as electronic transfers from other servicers' systems, and

support data accuracy and efficiency.

• The origination system establishes an initial loan record within the servicing system at closing.

• System edit reports are reviewed against loan documentation to ensure all fields have been properly completed,

and the quality control analyst performs a secondary audit.

• Transition meetings between origination and servicing begin a data review and documentation process of

upcoming closings.

• Servicing staff ensure the accuracy of loan documents against the data loaded to the servicing system.

• Welcome letters are system generated and mailed along with information about KBREC.

• A database application and document imaging system tracks all loan and CMBS documents, including deliveries

to trustees and/or custodians.

Extensive system interface and automation along with the dual review procedure ensures a well-controlled setup

process.

Payment Processing

• Loan payments are appropriately managed, with segregation of duties, and reflect a high level of automated

electronic capture. Total electronic capture rate increased to 99% (31% lockbox, 34% ACH, and 34% wires).

• KBREC utilizes KeyBank's wholesale lockbox and all funds (checks, wires, and ACH transactions) are processed




through the payment clearing account.

• Checks received on site are deposited same day via KeyCapture (check image deposit capture), and funds are

posted to the system within 24 hours. A control log is used to verify deposit and destruction of the paper check.

• A single control position handles the daily payment clearing to investor custodial account reconciliation, and a

separate control position performs monthly investor account reconciliation.

• Cash-managed accounts (hard lockboxes) are also handled automatically and online via borrower Web site and

the bank's Total Treasury tool application.

• Payment clearing is auto-swept to custodial accounts.

• Aging and suspense reports are monitored to ensure timely posting of items.

KBREC assigns individual staff to the reporting, remitting, reconciliation, and payment processing functions,

thereby providing appropriate separation of duties and internal controls. The 34% ACH rate has increased since

Standard & Poor's prior report and is at a relatively high level. The use of electronic image capture, similar to retail

POS applications, for on-site checks is reflective of KBREC's innovative approach to improving workflow and data

security.

Investor Reporting

A 40-position unit handles all investor reporting, as well as the loan accounting activities within the investor

portfolios.

• Monthly reports are supported from the servicing system and data warehouse.

• Customized investor reports, based on individual requirements, along with CMSA IRP 5.0 are automatically

generated by the systems and delivered electronically through KBREC's investor Web site.

• Remittances are all handled by repetitive wire instructions requiring two levels of authorization.

• Separate individuals handle bank account reconciliation utilizing an automated in-house program comparing

servicing system transaction data with custodial account activity and balances (principal, escrows, reserves, and

cash-managed loans).

The company has well-designed controls, procedures, and supervisor oversight and approval for investor reporting

and remitting. There were no instances of late or inaccurate reports.

Escrow Administration

The operations group is responsible for tax, insurance, and UCC refilings. Separate units perform the individual

activities.

• 42% of the portfolio is escrowed for taxes and 41% for insurance.

• RECWeb is used for tracking taxes and insurance, and enhancements were made from Standard & Poor's prior

report providing more details on property insurance requirements and coverage.

• A tax service is used for approximately 8% of both escrowed and nonescrowed loans, with all disbursements

made directly to the taxing authorities.

• Insurance monitoring is performed in-house and includes carrier ratings.

• Disbursements on escrow accounts are automated through the servicing system. Accounts are reanalyzed

post-disbursement.

• Insurance expiration notices are issued 30 days prior, with demand letters issued post-expiration.

• Great American Insurance Co. ('A/Stable' financial strength rating) provides forced-place coverage.

• UCCs are tracked on the servicing system, which issues six-month review/continuation reports. The portfolio




management staff handles re-filings through LienGuard, a third party service.

• RECWeb is used for task tracking reserve requests and releases, which are handled under delegation of authority

limits and require at least two approvals.

Standard & Poor's found the tax and insurance operations to be well-structured and controlled, and the procedure

manuals to be well-documented, covering all escrowed items (e.g. various reserves, letters of credit, loss claims),

disbursements, escrow item defaults, and forced placed insurance. RECWeb represents a well-defined and extensive

tool for monitoring an account's entire escrow profile.

Asset and Portfolio Administration

Loan and investor administration activities have been recentralized to Kansas City (from the Dallas location) with

the exception of the HUD/FHA and Ginnie Mae portfolios, which are still handled in Dallas. In addition to the

downsizing of the Dallas operation, the reorganization has also centralized to Kansas City institutional accounts

(primarily life companies) that were previously administered in St. Louis and Cleveland.

• Surveillance analysts are assigned by deal and handle financial statement analysis and watchlist reporting.

• The servicing systems track financial statements and property inspection update requirements.

• Inspections and financial statements range from quarterly to biannually and are procured in compliance with loan

documents and investor/PSA requirements.

• RECWeb is used to record financial statements, rent rolls, property inspections, as well as insurance and tax

documents.

• All original documents are imaged upon receipt.

• Inspections are mainly outsourced based on approved vendor lists and require standard formats and electronic

submission to KBREC.

• The servicing system tracks deferred maintenance and corrective actions.

• Watchlist reporting is based on CMSA and specific investor requirements. Triggers (e.g., delinquency, DSC, lease

expiration, etc.) automatically flag loans for watchlist inclusion.

• Other elements, such as tenant bankruptcy, are reviewed for watchlist inclusion.

• Account managers are responsible for monitoring overall activities associated with including loans on the

watchlist, as well as handling requests for reserve disbursements, leasing reviews, assumptions, modifications,

partial property releases, and initial collection efforts.

• Senior managers, prior to investor reporting dates, review the watchlist to ensure accuracy.

• The applicable department managers, supervisors, account managers, and surveillance analysts comprise the

watchlist committee.

• Monthly conference calls regarding watchlist loans are held with master and special servicers, as well as

third-party investors.

• Risk ratings are provided on non-CMBS portfolios based on each third party's individual investor requirements.

• Risk ratings are reviewed on a quarterly basis, and non-CMBS watchlisted loans are formally reviewed on an

asset quality report (AQR). Senior managers and a senior credit committee review the AQR prior to investor

submission.

The RECWeb financial statement module is comprehensive and provides easy input from borrower statements and

tracking of normalization entries, with a variety of comparison choices to prior periods or underwriting statistics.

The company maintains good controls over the receipt of financial statements, closely monitors borrower

compliance, and achieved a 97% collection of year-end statements by June.




Borrower Requests

KBREC utilizes RECWeb for tracking borrower requests and also conducts customer satisfaction surveys. Of the

four specific request types that Standard & Poor's has been tracking, assumptions tend to be the one of most

concern. In that regard, KBREC performed exceedingly well compared with the overall average, and it generally has

a lower total turnaround time for all request types.

Chart 2

• Results from KBREC's surveys consistently show high levels of customer satisfaction.

• During the first half of 2008, KBREC handled approximately 460 borrower requests (assumptions, defeasance,

leasing consents, partial releases, and substitution of collateral) with an overall average elapsed time considerably

better than overall industry averages.

• Account managers who handle activities that may be internally approved (e.g., reserve draws) handle routine

borrower requests. More complex issues and those requiring third-party approvals are administered within the

asset management area coordinating with controlling class holders and/or rating agencies.

Improvements in RECWeb of logic-based rules, tracking of tickler date events, and auto-generated email alerts to

assigned staff and managers have helped support responses to borrower requests.

Early Stage Collections

Account managers are responsible for early collection efforts on delinquent accounts.

• System reports are monitored for past due payments.

• Borrower calls are initiated one day after the payment due date




• Default letters are sent at 30 days past due.

• Collection comments are tracked on RECWeb.

• The account manager reviews the account status with the servicing manager, after which the loan may be

transferred to the special servicer (60 days delinquent) or investor workout group.

Early stage collection operations are well-automated and acceptable. Although the delinquency percentages for

primary servicing have been increasing, they are reflective of current conditions, and the portion associated with

CMBS are within industry averages.

Loan Administration - Master Servicing

The ranking for master servicing is affirmed at STRONG.

As of June 2008, KBREC master serviced 85 deals for $85 billion with approximately 8,000 loans, of which $14

billion was provided by 31 subservicers.

Table 4

Servicing Portfolio







Master (SBO) 14,224 1,744 14,582 1,912 10,074 1,814 4,448 496 2,159 289

# of Subs 31 35 42 31 27

Average LoanSize

8.2 7.6 5.6 9.0 7.5

Delinquency %

30 Days 0.00 0.06 0.22 0.47 0.00 0.11 0.47 0.60 0.00 0.00

60 Days 0.00 0.00 0.01 0.05 0.09 0.11 0.00 0.00 0.00 0.00

90+Days 0.15 0.34 0.19 0.26 0.08 0.22 0.13 0.60 0.24 1.04

Total 0.15 0.40 0.43 0.78 0.17 0.44 0.60 1.21 0.24 1.04

Table 5

Total Portfolio Breakdown By Property And State

Six-month period ending June 30, 2008

UPB (Mil.$) Properties (#) % UPB Properties (%)

Type

Office 33,166 2,130 24 14

Multifamily 24,844 3,564 18 23

Retail 24,996 3,537 18 23

Lodging 16,338 900 12 6

Ind. & Whs. 8,574 1,060 6 7

All Other 29,796 4,188 22 27

Total 137,714 15,379 100 100

State

Calif. 21,652 2,155 16 14




Table 5

Total Portfolio Breakdown By Property And State (cont.)

N.Y. 20,968 1,151 15 7

Texas 11,824 1,600 9 10

Fla. 10,225 1,282 7 8

N.V. 6,003 270 4 2

All Other 67,041 8,921 49 58

Total 137,714 15,379 100 100

Table 6

Portfolio Breakdown By Investor

As of June 1, 2008

UPB (Mil.$) Loans (#) UPB (%) Loans (%)

On Book 11,580 238 8 2

CMBS 92,683 8,745 67 66

GSEs 5,737 526 4 4

Banks/Fin. Institutions 9,450 2,899 7 22

Life Co's. 1,341 231 1 2

CRE-CDOs 791 36 1 0

All Others 16,133 580 12 4

Total 137,714 13,255 100 100

The loan operations, investor reporting, and surveillance groups cover, respectively, monthly remittances from

subservicers, consolidation of data for master reporting and cash reconciliation, and monitoring and surveillance of

subservicers. The structure provides for monitoring at the loan and deal levels.

Loan Setup and Data Integrity

NLSU procedures are similar to the process used for primary serving.

• Subservicer downloads are used for electronic conversion to the servicing system and system error reports and

edit checks ensure accuracy of data.

• KBREC expanded the number of fields for shadowed servicing to include escrow items and selected tickler dates.

• Property insurance coverage levels of subserviced loans are reviewed for note and PSA compliance.

• A dedicated administrator for master servicing reconciles SBO (serviced by others) loan setup balances and other

data elements that are compared with the loan file and securitization prospectus.

Overall, KBREC has acceptable NLSU procedures.

Subservicer Accounting and Reporting

KBREC utilizes its servicing system and data warehouse application to shadow post loan level information from

subservicer monthly reports under a batch process.

• Subservicers provide monthly remittances via wire transfers to KBREC along with electronic loan level files for

updating the servicing system and data warehouse.

• Subservicer loan level records are matched to the wire transfer remittance, and, if in balance, automatically

update the shadow loan record on KBRECs application via batch posting.




• The compliance and quality control area handles the monitoring of compliance with tax and insurance

requirements per subservicing agreements.

• Subservicer reports are generally received in CMSA format and consolidated with KBREC's primary portfolio for

reporting.

• Investor reporting handles advancing and recoverability testing under an appropriate delegation of authority.

• Cash remittances to investors and trustees are made by wire transfers, which are performed under dual controls.

Overall, subservicer and master servicer transactional activities are under well-controlled environments. Shadow

servicing of tax and insurance records demonstrate a proactive approach to monitoring subserviced portfolios.

Escrow Administration

Loan-level records are setup as nonescrowed items for taxes and property insurance, and a shadow posting routine

is followed.

• Subservicer reports are reviewed regarding paid dates and electronic uploads are used to update loan-level

records. Past due items are discussed with the subservicer.

• Subservicer officer certifications are received as required under the particular subservicing agreements.

Loan-level shadow tracking of tax and insurance compliance dates is a sound and proactive procedure indicative of

a highly rated servicer.

Subservicer Administration and Portfolio Management

Similar to escrows, asset and portfolio activities for inspections, financial statements, and UCC expirations are

shadow tracked on KBREC systems using tickler dates. Borrower requests requiring master servicer authorization

are tracked for response to the subservicer. Collection efforts, delinquencies, and watchlist monitoring are rolled up

to KBREC's managerial reports and investor reporting.

• As part of the loan setup record, tickler dates are established for property inspection, financial statements, and

UCCs. Account managers compare system reports with subservicer information for updating required items.

• Subservicers supply updated financial statements in CMSA format, and are uploaded to RECWeb for spreading

and analysis. Original statements are imaged and linked to RECWeb for inquiry. DSC and other financial ratios,

rent rolls, and upcoming lease expirations are reviewed for compliance.

• Property inspection reports are imaged, uploaded to RECWeb, and reviewed for deferred maintenance items,

which are monitored on the systems for corrective action by the subservicer.

• The account manager monitors UCC expirations and renewals.

• KBREC requires subservicers to provide the same level of CMSA watchlist reporting they require for their own

portfolio, which includes subservicer watchlisted accounts within the company's overall management review and

monitoring.

The company has good controls in place over the asset administration activities of subservicers. Whenever possible,

KBREC receives subservicer information electronically (inspection reports, financial statements), which facilitates

updates to the data warehouse.

Subservicer Compliance

The company has well-described procedures for monitoring subservicer compliance at the individual loan levels, as

well as general operations and corporate compliance requirements under the subservicer agreements.




• Periodic subservicer audits occur approximately every 18 months for on-site audits and 12 months for desk

reviews, or more often as necessary if indications of noncompliance are observed.

• Officer compliance certificates are required quarterly and corporate financials, D&O and E&O insurance, and

USAP confirmations are required annually.

• Any audit findings are communicated to the subservicer including a time frame for response and correction.

As of June 2008 KBREC had completed five desk reviews and one on-site audit of its subservicers. There were no

significant findings. Standard & Poor's believes the subservicer audit procedures and reports to be thorough, as they

covered all critical servicing areas.

Advancing and Special Servicer Interaction

The portfolio management area maintains close contact with special servicers by way of monthly conference calls for

review of watchlist loans. IRP comments are refreshed monthly keeping all parties well-informed. The company

employs a conservative formula in its determination of continuing principal and interest (P&I) and other servicing

advances, and it requires appropriate valuation/appraisal updates prior to advancing and for recoverability

determination.

Loan Administration - Special ServicingTable 7

Special Servicing


ActiveInventory

UPB(Mil.$)

No. Averageage (mo.)

UPB(Mil.$)


UPB(Mil.$)


UPB(Mil.$)


UPB(Mil.$)


Loans 262 10 8 7 2 25 38 6 36 14 5 14 147 14

REOs - 0 - 0 5 1 5 - -

Total 262 10 7 2 42 7 14 5 147 14

The Special Servicing ranking is affirmed at STRONG.

As of June 2008, KBREC was named special servicer on 17 CMBS transactions (current UPB $13.6 billion for 438

loans) and had an active CMBS portfolio of $262 million for ten assets. Also as of June, the asset

management/special serving group was monitoring an additional $1.7 billion comprised of four CMBS condo/hotel

conversion and renovation projects (not transferred to a third party special servicer), 62 Loan Income Housing Tax

Credit projects (LIHTC), and 51 KeyBank investment fund management account assets. This latter group of an

additional $1.7 billion, while not reflected within the Special Servicing assignment numbers, reflects various levels of

concern over loans and asset performance issues that may involve increased borrower contact, negotiations,

modification, and/or asset sales, and for which the transactions have been placed within the Special Servicing/Asset

Management area for continual surveillance.

Historically KBREC has resolved problem loans and foreclosed REO assets with disposition times and collection

values within commendable ranges given the nature of the assets.

Average experience for the seven special servicing asset managers is five years with the company and 13 years of real

estate workout experience in the industry. Although the special servicing unit is somewhat small, it is commensurate

with current workloads. The company has additional personnel within primary servicing, and its nationwide offices




that have workout experience and could be assigned to handle problem loans/REOs in the event of significant

increase in volumes. KBREC expects each asset manager within special servicing to handle up to 15 assets, which is

commensurate with current assignments. This is an acceptable load ratio that is well within industry norms. In

addition to the special servicing activity within KBREC, the bank has separate asset recovery groups in eight states

that provide local information and can serve as additional resources for bank problem loans and REOs. The special

servicing group actively supports master servicer operations–in many instances forestalling transfer to special

servicing due to early detection and involvement with problem loans.

Table 8

Resolution Breakdown

Jun-08 Dec-07 Dec-06 Dec-05

UPB(Mil.$)

No. Avg. Time(mo.)

UPB(Mil.$)

No. Avg. Time(mo.)

UPB(Mil.$)

No. Avg. Time(mo.)

UPB(Mil.$)

No. Avg. Time(mo.)

Returned to Master 0 0 0 0 0 1 1 35 6 1 12

Full Payoffs 0 0 7 3 7 6 3 11 71 4 13

DPO &/or NoteSale

0 0 3 3 12 6 2 35 59 6 9

Foreclosed Loans 0 0 3 1 8 5 1 9 5 1 25

Total/Average 12 7 18 7 141 12

Loan Recovery and Foreclosure Management

Special servicing personnel participate in monthly watchlist reviews and master servicer conference calls to gain

familiarity with each asset prior to potential transfer.

• Upon transfer, loan workout plans are completed within 60 days.

• Plan templates include a thorough review of the collateral, default issues, cash flow analysis for alternative

courses of action, and recommended net present value resolution strategy.

• A checklist of third-party contracting items (inspections, appraisal, environmental, title) is included in supporting

the plan.

• Senior management reviews the plans and subsequently approves them in formal committee.

• The assigned workout specialist coordinates recommendations for foreclosure and outside legal counsel and other

approved vendors as needed.

• Separate areas external to the servicing organization (vendor contracting, asset recovery, and technical/appraisal

services) are involved in supporting special servicing activities for execution of recovery plans if needed.

• The loan-to-REO transfer process is tracked on RECWeb.

• Plans are updated as changes to the strategy occur but no less than annually.

• REO plans are required within 30 days of title transfer and provide a review of all issues including tenants, local

markets, property management assignment, proposed marketing strategy, operating budget, and sale price.

The company has sound procedures and an experienced staff to efficiently handle asset management activities for

problem assets. Recoveries have been at commendable levels, and KBREC's fewer occurrences of REO resolutions

are commensurate with its preference to resolve problem loans within the loan stage, without taking foreclosure

titles unless necessary. Standard & Poor's believes this to be a positive approach, supported by historical reviews

and results that losses on loan workouts are usually lower than losses on foreclosures.




REO Management and DispositionsTable 9

REO Management And Dispositions

Jun-08 Dec-07 Dec-06 Dec-05

REO Sales UPB(Mil.$)

No. Avg. Time(mo.)

UPB(Mil.$)

No. Avg. Time(mo.)

UPB(Mil.$)

No. Avg. Time(mo.)

UPB(Mil.$)

No. Avg. Time(mo.)

Est. Market Value - 0 6 2 6 0 0 0 5 2 25

Net Sales - 5 0 6

% Sale/MarketValue

0% 77% 106%

The company maintains approved vendor lists for property managers, brokers, and other third-party vendors and

uses the bank's asset recovery group's regional offices for local vendor and market information. As indicated

previously in this report, KBREC focuses on resolving developing problems prior to an initial transfer to special

servicing, as well as prior to foreclosing on properties. That successful bias has lead to only a small amount of REO

properties.

• Special servicing makes the initial vendor recommendation; however, the separate vendor contracting area

handles the administrative duties associated with competitive bidding and vendor engagement.

• The asset manager is responsible for daily oversight of the property manager, which includes the monthly review

of operating statements and periodic site visits.

• REO property accounting reports are input to spreadsheets that feed the OSAR portion of the CMSA IRP to

facilitate historical comparison.

• The spreadsheets also serve actual-to-budgeted plan monitoring.

• The augmented servicing system provides separate foreclosed property level operating accounts and feeds the

CMSA IRP, as well as facilitates historical, budget, and plan comparisons.

• REO plan and sale offers are reviewed in committee.

In addition to managing properties from foreclosed real estate loans, the group also handles performance issues and

equity interests associated with LIHTC properties. Workouts for this asset type are complex involving additional tax

status regulatory issues. LIHTC problems involved replacing problem property managers and/or general partners

and achieving repositioning and operating improvements for the properties. For CMBS, advantageous loan-workout

plans have generally resulted in fewer REO properties to manage and sell. The loans that were handled through a

complete foreclosure and sale process reflected good recoveries relative to the underlying assets.

REO Accounting and Reporting

Cash management and accounting is handled under a single trust accounts established for each individual property.

• Property managers deposit rental income to the account, and the assigned asset manager funds the account, under

proper controls, for shortfalls to pay monthly expenses.

• Additional approvals are required if rents or expenses do not conform to the approved REO plan.

• Property manager monthly reporting packages include bank statement reconciliations, which are reviewed by the

asset manager prior to input on customized spreadsheet application that rolls up KBREC's data warehouse and

links to investor reporting.

• Comments relative to the REO plan are also input, which facilitates rollup to the master servicer trustee

reporting.




• KBREC's accounting staff performs an independent review of the financial statements, bank account activity, and

reconciliation.

• On-site property manager audits have been conducted on an exception basis due to the relatively few operating

properties.

Given KBREC's very low volume of REO properties, utilization of spreadsheets to track and monitor actual verses

plan performance, given other internal controls over cash, bank account reconciliation, and property manager

oversight, is acceptable. If foreclosure activity was to substantially increase, a stand-alone property management

application may be beneficial to reduce workloads and increase efficiency through direct property manager

accounting statements and bank account uploads.

Subcontracting Management

KBREC has a separate contracting department that manages the selection and engagement process for outside

vendors, including property managers, brokers, inspection firms, appraisers, and environmental consultants.

• The contracting department maintains approved vendor lists, which generally require various qualifications such

as state certifications, licensing, and insurance coverage.

• Standard form engagement contracts are used for each service.

• To place the contract, appraisal requests are coordinated through the bank's internal appraisal department.

• The contracting staff tracks the status of all engagements, monitors contract performance, and reviews invoices in

conjunction with the asset managers.

• Post-assignment scorecards are used to monitor vendor performance.

Internal proprietary computer applications are used for several of the contracting functions that handle ordering,

tracking, invoice approval and payment processing, as well as work product grading to assist in vendor annual

evaluations.

Investor Reporting

Special servicing reports for master servicers are provided through the data warehouse using a combination of the

servicing system, asset administration (RECWeb) system, and standard reporting templates.

• Incorporating the data flow through the OSAR module facilitates updating the performance and status of the

REO property to the master servicer and investor.

• Additional standardized detailed templates and monthly status reviews support information provided to master

servicers/investors and trustees.

• The special servicing group participates in monthly master servicer conference calls regarding watchlist and

transferred loans.

Legal Department

An outside law firm serves as KBREC's general counsel on all individual asset matters, and KeyCorp's legal

department is used on all corporate matters.

• Two senior KBREC officers, with the general counsel, review recommendations for outside third-party counsel

prior to engagement.

• The company uses a separate legal tracking system for monitoring bankruptcy and foreclosure activity.

• The asset managers, servicing manager, and general counsel review expenses for legal services prior to payment.




Financial Position

The ranking for financial position is affirmed at SUFFICIENT.

This assessment is based on Standard & Poor's current 'A-/Negative' counterparty rating for KeyCorp. For more

information on KeyBank U.S.A. and KeyCorp, please refer to RatingsDirect, Standard & Poor's Web-based source

for credit ratings, research, and risk analysis.

Contact Information

KeyBank Real Estate Capital's servicing operations are headquartered in Kansas City, Mo.

KeyBank Real Estate Capital

911 Main Street

Kansas City, Mo. 64105

Marty O'Connor

(816) 460-2170

Bryan Nitcher

(816) 460-2107

www.key.com




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