Rationale

S&P Global Ratings' ranking on Green Loan Services LLC (GLS) is AVERAGE as a commercial mortgage loan special servicer. On June 26, 2023, we affirmed the ranking (see "Green Loan Services LLC AVERAGE Commercial Mortgage Loan Special Servicer Ranking Affirmed; Ranking Outlook Stable," published June 26. 2023). The ranking outlook is stable.

Our ranking reflects GLS':

• Capacity to operate as an effective special servicer, particularly for larger, complex commercial mortgage loans secured by Manhattan office properties;
• Experienced and tenured senior management team;
• Ability to leverage extensive real estate-related expertise through its parent company, SL Green Realty Corp. (SLG);
• Sound technology environment, despite the lack of a dedicated special servicing system;
• Growing named special servicing portfolio along with increased recent activity of large loan CMBS special servicing resolutions;
• Modest track record of handling CMBS real estate-owned (REO) dispositions, which is mitigated by SLG's experience in repositioning underperforming and distressed assets as an equity owner; and
• Adequate internal control environment, that includes an annual Regulation AB compliance attestation, although its policies and procedures lack task-specific details and are infrequently updated.

Since our prior review (see "Servicer Evaluation: Green Loan Services," published June 1, 2021), the following changes and/or developments have occurred:

• We lowered SLG's corporate credit rating to BB+, with a stable outlook, from 'BBB-' (see "Research Update: SL Green Realty Corp. Downgraded to 'BB+' From 'BBB-' On Sustained Elevated Leverage", published Dec. 22, 2022).
• GLS' named CMBS special servicing portfolio grew to $4.7 billion across five loans and five transactions, as compared to one loan and one transaction totaling $308.0 million.
• In 2021, GLS completed two CMBS large loan resolutions: the restructuring and reinstatement of a 34 property, $846.2 million retail loan and a full payoff on a $330.0 million loan collateralized by the retail and office space at Union Station in Washington, D.C. In 2023, GLS oversaw the modification of a large $485.0 CMBS loan collateralized by a Manhattan office property.
• GLS has established relationships with three CMBS third-party controlling class representatives (CCRs), who have recently appointed GLS to special servicing assignments.
• SLG and GLS experienced significant senior manager turnover, including its chief investment officer, as well as at the deal manager level.

The ranking outlook is stable. We believe GLS will remain an effective special servicer for a limited volume of large, complex loans, which are the type of collateral traditionally found in single-asset single-borrower CMBS transactions. Over the past couple of years, GLS has been more active as a special servicer, completing successful loan resolutions. In our view, it should remain active as certain office properties experience distress due to a decrease in demand for office space. Should GLS continue to build its track record of successful loan resolutions and maintain special servicing metrics that are comparable to ranked peers, we could raise its special servicing loan administration subranking at the time of our next review.

In addition to conducting an on-site meeting with servicing management (one S&P Global Ratings analyst attended virtually), we reviewed current and historical Servicer Evaluation Analytical Methodology data through Dec. 31, 2022, as well as other supporting documentation provided by the company.

Profile

GLS, established in 2005 as a wholly owned subsidiary of SLG, is a special servicer with an expertise in handling large, complex loans, particularly those collateralized by office properties. SLG, a fully integrated public REIT, is New York City's largest owner of office real estate. Formed in 1997, SLG primarily owns, acquires, manages, and repositions office and retail properties located in Manhattan. As of March 31, 2023, SLG held interests in 60 Manhattan and surrounding area office, retail, and development/redevelopment properties totaling 33.1 million sq. ft. Although SLG is primarily an equity owner, its first-quarter 2023 portfolio also contained $626.8 million of debt and preferred equity real estate investments.

GLS' special servicing assignments are typically sourced from SLG's third-party relationships and the loans owned in its structured finance business. As of Dec. 31, 2022, GLS was the named CMBS special servicer on five loans totaling approximately $4.7 billion in unpaid principal balance (UPB), an increase from one loan totaling $308.0 million in UPB as of June 2021.

Table 1

Management And Organization

The management and organization subranking is AVERAGE.

Organizational structure, staff, and turnover

Given its small special servicing loan portfolio size and SLG's primary focus on owning and managing equity investments, SLG and GLS does not have any employees fully dedicated to special servicing. Special servicing assignments are instead handled by SLG's and GLS's senior managers, and underwriting and credit staff. As of Dec, 31, 2022, GLS reported that it had 14 employees who are designated to work in part on special servicing (see table 1), which was stable from the time of our last review. When working on special servicing assignments, the 14 designated special servicing employees leverage other resources from SLG, including information technology (IT); legal; leasing; real estate operations; finance, tax, and accounting; and risk management. All of GLS' employees work from its Manhattan office.

Most of GLS' reported 14 special servicing employees are at the management level (eight senior managers and two middle managers). The senior managers have substantial commercial real estate experience and significant tenures with SLG, while the middle managers' and staff's experience and tenure is lower than most of GLS' peers (see table 2). Management indicated that those who are designated to serve as the lead asset managers on loan resolutions have from five to 10 years of experience, which is an experience level generally lower than other ranked servicers.

Table 2

GLS' turnover rate was 24% in 2021, which corresponded with high turnover rates for most S&P Global-ranked servicers due to a tight labor market. Turnover decreased to a more normalized 14% in 2022. In part because the majority of GLS' reported employees are senior managers, all but one of the employee departures in 2021 and 2022 occurred at the senior manager level. During the past two years, SLG has had significant turnover at the chief information officer (CIO) and deal manager level.

Training

GLS' staff primarily receives on-the-job training through coaching and mentoring, which are typical delivery methods for a servicer of this staff size.

The training features considered in our assessment include:

• The special servicing team occasionally attends seminars offered by industry professionals on topical issues (i.e., loan documentation, cash management, special servicing issues, defeasance, and environmental matters). Some staff members also participate in industry conferences.
• While it does not formally track its employees' training hours, GLS says it targets 20 training hours per employee annually, which is lower than most servicers we rank.
• SLG employees receive monthly cybersecurity awareness training snapshots and more extensive quarterly training that requires the attendees to complete an awareness exercise at the end of the training.
• Workplace discrimination and harassment training are also required annually.

Systems and technology

SLG has effective technology to meet its special servicing requirements. GLS' technology platform is supported by IT professionals from SLG. SLG has well-designed data backup routines and disaster recovery preparedness.

Servicing system applications  

The technology platform includes purchased and proprietary applications that provide real estate accounting and asset activity tracking to support special servicing work and related reporting for the SLG platform. Unlike many of our ranked special servicers that have more loans in their portfolios, GLS does not have a fully dedicated special servicing system. Instead, most of the analysis and evaluation of loan strategies and alternatives is done on custom Excel spreadsheets in conjunction with Argus.

GLS uses the following SLG systems for special servicing functions:

• Chatham Financial's FMS Debt Management System, a web-based platform with portfolio analytic and reporting tools that stores individual loan details and valuations;
• Argus, a software used for commercial real estate cash flow projections;
• Yardi, a property management software used by SLG's accounting department;
• MRI (specifically it's Workspeed module), a software used to monitor tenant request fulfillments; and
• Imaging technology used to store all legal and deal documents.

Business continuity and disaster recovery  

SLG maintains disaster recovery procedures, and it reviews, updates, and tests them annually. The most recent test, completed in August 2022, cited no material issues. With help from a third party, SLG utilizes a disk-to-disk-to-cloud server and system back-up strategy. The objective of SLG's disaster recovery program is to restore the portion of IT resources supporting special servicing's investor reporting operations within two days of a disruption (and all other business functions within four days). We note that many of our higher ranked servicers have the ability to resume key servicing functions within 24 hours.

The chief operating officer oversees SLG's business continuity plan, which is reviewed annually. Though employees worked remotely for a period of time during the COVID-19 pandemic, SLG strongly prefers that its employees go into the office five days a week. Therefore, SLG maintains a business continuity site in White Plains, N.Y., which is located more than 25 miles from its Manhattan headquarters. SLG employees receive an alert by either email from department heads, mass system notification from human resources, or by a call tree if it has been determined that they should report to the White Plains office.

Cybersecurity  

SLG utilizes multiple layers of security controls and various tools to protect company data, applications, and servers from attacks and intrusions. Notable cybersecurity and data protection features include:

• Annual third-party penetration testing is performed by a rotating group of vendors. The last test was conducted in October 2022;
• A comprehensive cybersecurity review, which is a part of a biennial risk assessment that is presented to the board of directors;
• Continuous external personal computing security monitoring;
• Multi-factor authentication required to access company systems;
• Multiple layers of network firewalls;
• In-house legal expertise or third-party legal counsel are on retainer for cybersecurity matters; and
• SLG conducts monthly cybersecurity awareness training exercises and testing, and phishing simulation training emails are frequently sent to employees to increase awareness.

Internal controls

GLS maintains an acceptable internal control environment for a servicer of its portfolio size. Special servicing policies and procedures, though lacking a cadence of annual updates, provide a high-level overview of GLS' proactive approach to managing special servicing assets. The company has maintained clean Reg AB audits in recent years, including in 2021 and 2022. In addition, although it does not conduct internal audits on special servicing, there is some evaluation of SLG's overall control environment in order to support management's Sarbanes-Oxley 404 assertion.

Policies and procedures (P&Ps)  

GLS' P&Ps convey an overall proactive approach to loan resolutions and describe appropriate controls for asset-level recommendations, approvals, and vendor management. GLS has indicated that it reviews the P&Ps annually and makes updates as necessary; however, we note that it does not appear that GLS has made any updates to the P&Ps for some time now.

Internal and external audits  

SLG and GLS do not conduct an internal audit of special servicing, which is not surprising given the relatively small role that special servicing plays in the company's business plan. However, as support for management's annual Sarbanes-Oxley 404 assertion, SLG and an independent accounting firm review GLS' property- and portfolio-level accounting activities and procedural compliance, as well as its overall control environment.

The Reg AB external audit for calendar years 2021 and 2022 indicated no material findings. Because GLS has become more active in special servicing resolutions over the past two years, the scope of Reg AB applicable criteria has increased.

Insurance and legal proceedings

GLS has represented that its directors and officers, as well as its errors and omissions insurance coverage are in line with the requirements of its portfolio size. As of the date of this report, there were no material servicing-related pending litigation items.

Loan Administration

The loan administration subranking is AVERAGE.

GLS' third-party special servicing assignments have contributed to portfolio growth since our last review, with three external CCRs appointing GLS for recent assignments. As of Dec. 31, 2022, GLS was the named special servicer on five CMBS deals totaling $4.7 billion in UPB and was actively special servicing one loan totaling $308.0 million. However, the $308.0 CMBS loan in active special servicing at year-end 2022 (see table 3) has since been transferred to another special servicer following a change in CCR. The loan is collateralized by a Manhattan office property where the borrower has indicated it wishes to transfer ownership to the lender.

While GLS did not complete any loan resolutions in 2022, the company completed two sizable resolutions in 2021 totaling almost $1.2 billion in UPB (see table 4):

• A 34-property, $846.2 million CMBS loan where GLS replaced the original special servicer and successfully negotiated a modification and a return to master servicing without a loss to the trust; and
• A $330.0 million CMBS loan collateralized by the retail component of Union Station in Washington, D.C., where GLS also replaced the original special servicer and, according to management, its initiation of foreclosure led to a full repayment of the loan.

Additionally, in the first half of 2023, GLS modified a $485.0 CMBS loan collateralized by a Manhattan office property. The borrower asked that the loan be transferred to special servicing due to an upcoming loan maturity. Acting as the special servicer, GLS oversaw a maturity date extension on the loan.

Table 3

Loan recovery and foreclosure management

GLS has a properly controlled loan workout and foreclosure management processes. The features considered in our assessment include:

• Asset transfer procedures that call for a title run-down, real estate tax review, insurance coverage review, market research analysis, collateral evaluation and estimate of recoverability, and an inspection by an asset manager using a standard report format.
• GLS requires that borrowers sign pre-negotiation agreements prior to entering into workout discussions.
• Within 30 to 60 days of an asset's transfer to special servicing, asset managers prepare an asset business plan that substantiates a recommended action based on an analysis of available exit strategies. Business plans include the current asset status and a financial analysis.
• All business plans are presented to the senior vice president-asset management for review and subsequently, for approval by the SLG credit committee (president, CIO, CEO). A business plan is reviewed monthly by an asset manager and modified as necessary, and presented for approval.
• The asset manager and senior vice president-asset management obtain foreclosure approvals from the credit committee through a presentation that outlines the bid value and projections of potential losses accompanied by a written memorandum.
• The asset manager will order an updated environmental assessment from a list of approved vendors when deemed necessary in consultation with the property manager, if applicable. Environmental considerations are evaluated before taking title to a property, and the asset managers review reports and discuss any issues with the senior vice president-asset management.

Table 4

REO management and disposition

Although its parent company is a large and sophisticated owner of commercial real estate, GLS has had a limited track record of managing and disposing of REO assets as a commercial mortgage loan special servicer. Since 2010, it has reported only six foreclosures, with the latest occurring during 2020 on a non-securitized loan. Further, GLS reported no special servicing REO sales activity during the past several years because the REO properties have been marketed for sale but have undergone remedial action while remaining in the SLG-owned portfolio.

Despite its limited REO track record, GLS has P&Ps to guide an asset manager through the property management and sales process, as well as available technology applications to facilitate related tracking and reporting. In general, related procedures call for asset managers to work closely with and rely on SLG's experienced property management, leasing, and marketing personnel to assist with its REO assets. These procedures indicate acceptable controls and include the following:

• Upon taking title, the asset manager provides accounting and other departments with key details in a memo so that internal reporting will reflect the change in asset status.
• The senior vice president–asset management engages an appraiser from the approved list following completion of the foreclosure. Property held for more than one year is re-appraised.
• For non-CMBS loans, the asset manager will transfer the asset to SLG property management and leasing, where possible. Otherwise, a third-party property manager is selected through a thorough review process.
• Within 30 to 60 days of taking title, the asset manager inspects the property, obtains the property manager's initial budget, and prepares an REO business plan for credit committee approval.
• The asset manager consults with SLG's construction services department on maintenance and budgeting issues, and to adjust recovery expectations.
• Third-party brokers are used to list REO assets for sale and asset managers provide senior management with monthly sales progress updates received from the broker.
• Asset managers work with the in-house legal staff to select external counsel for negotiating sales contracts and coordinating closings.
• The credit committee approves each REO property's terms of final resolution.

REO accounting and reporting

In anticipation of taking the title of an REO asset, GLS' asset managers work with SLG's accounting personnel to set up and control the REO asset's accounting with the same processes that are also used in SLG's equity portfolio. The accounting staff is responsible for establishing the REO asset's operating accounts and maintaining ongoing accounting records of all monthly receipts and disbursements. The accounting group is also responsible for reconciling monthly REO accounts from data submitted electronically by the property manager. GLS uses Yardi software to store key tenant data, process receipts and disbursements, and to track budget variances. Disbursements require senior management approvals.

Subcontracting management

GLS has established a sound approach for engaging appraisal firms, environmental consultants, and brokers with acceptable plans to monitor work assignments and review completed work products. Specialized SLG departments for property management, leasing, and marketing manage the engagement processes for the respective areas together with the asset manager. In addition:

• GLS maintains an approved vendor list in conjunction with engaging appraisers, engineering and environmental firms, and real estate brokers;
• GLS uses standard engagement letters and agreements for engaging real estate brokers and property management companies; and
• Vendor engagements require senior level approval.

Borrower requests

GLS reported three borrower consent requests in 2022: two leasing consents and one forbearance request. This was the first time in several years that GLS reported any borrower consent activity. Though borrower consent activity is not thoroughly addressed in GLS' P&Ps, they do describe the leasing approval process, which involves analysis against underwriting and updated projections. GLS can also consult SLG's leasing department if needed to address leasing consents.

Legal department

GLS has an effective legal oversight function. An in-house legal department consisting of two attorneys manages external counsel engagements, tracks the progress of litigation, and advises asset managers. The legal staff engages external counsel from an approved list of law firms. External counsel is required to provide a budget estimate for the case. The senior vice president–asset management and GLS' legal staff must approve all legal bills.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Green Loan Services LLC AVERAGE Commercial Mortgage Loan Special Servicer Ranking Affirmed; Ranking Outlook Stable, June 26, 2023
• Select Servicer List, May 5, 2023
• SL Green Realty Corp. Downgraded To 'BB+' From 'BBB-' On Sustained Elevated Leverage, Dec. 22, 2022
• Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022
• SL Green Realty Corp., Dec. 14, 2021
• Servicer Evaluation: Green Loan Services LLC, June 1, 2021
• Servicer Evaluation Spotlight Report: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019