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$958M State Farm sale-leaseback deal a precursor to CMBS transaction

A portion of a mortgage loan on a new 2 million-square-foot Tempe, Ariz., office complex serves as the collateral for a single-borrower commercial mortgage-backed securitization sponsored by a Goldman Sachs Group Inc. affiliate.

Transwestern Investment Group LLC announced Dec. 7 that Corporate Properties Trust III LP, a partnership between the real estate investment adviser and Phoenix-area developer JDM Partners LLC, closed on a sale-leaseback transaction for the Marina Heights property with State Farm Mutual Automobile Insurance Co. The deal, which S&P Global Ratings valued in a presale report for GS Mortgage Securities Corp. Trust 2017-FARM at $958 million, marks the third sale-leaseback transaction to date between Transwestern and State Farm as part of the insurer's plan to build superregional hubs.

S&P Global Ratings said a $264 million portion of a $560 million whole commercial mortgage loan with a 3.56% fixed interest rate will be securitized in the transaction. Goldman Sachs Mortgage Co. and German American Capital Corp. hold the balance of the loan and intend to securitize that position in separate transactions. State Farm's leases account for about 97.1% of the net rentable area and 98.8% of the total gross rent of the seven-building, 20-acre Marina Heights property adjacent to the campus of Arizona State University.

"It was built to consolidate approximately 10,000 State Farm employees that are relocating from other office properties in the western half of the U.S.," S&P Global Ratings said in the presale report, which noted that approximately 7,000 employees currently work at the property.

Transwestern previously partnered with Seoul-based Mirae Asset Global Investments Co. Ltd. on a sale-leaseback deal involving a 591,000-square-foot State Farm office tower in the Atlanta area in a deal that closed in July. The same parties teamed up in October 2016 for a sale-leaseback deal involving State Farm's 2.2 million-square-foot mixed-use CityLine project in Richardson, Texas, outside of Dallas. The $452.3 million mortgage loan on that property backed CityLine Mortgage Trust 2016-CLNE, a CMBS deal that closed in November 2016.

The 2017-FARM CMBS transaction is expected to close Dec. 29, S&P Global Ratings said.

State Farm's investment in the superregional hubs and its pursuit of sale-leaseback transactions involving its regional operations centers, which the company positioned as part of a broader effort to meet evolving customer needs, have had a significant impact on several aspects of its investment portfolio.

The carrying value of the top-tier State Farm entity's investment in real estate that it occupies for administrative purposes fell to $412.3 million at year-end 2016 from nearly $1.06 billion five years earlier. The company's Corporate South facility in Bloomington, Ill., accounted for $232 million of the 2016 total. It was one of only two administrative properties to which State Farm assigned carrying value of $20 million or more at that time; at the end of 2012, it had 16 properties meeting that description.

Occupied properties accounted for less than 0.3% of the top-tier State Farm entity's net admitted cash and invested assets as of Sept. 30, down slightly from year-end 2016 and well below the nearly 1% they represented as of Dec. 31, 2012.

The company's carrying value of investments in affiliated joint ventures, partnerships or limited liability company interests having the underlying characteristics of real estate, meanwhile, increased to $1.06 billion as of Dec. 31, 2016, from $114.8 million at the end of 2012. The increase largely reflected State Farm's ownership of entities linked to the superregional hubs as they underwent development.

State Farm's 100% stake in Tempe Office Investment LLC accounted for $635.7 million of the year-end 2016 total in that category. Documents on file with the City of Tempe indicate that State Farm is the sole member of Tempe Office Investment LLC. Insurance statutory filings show that Tempe Office Investment held a 98% stake in the project's developer, SFSR Marina Heights LLC.

Other long-term invested assets, including those affiliated limited liability company stakes, increased to account for 4.1% of the top-tier State Farm entity's net admitted cash and invested assets as of Dec. 31, 2016, from less than 2.6% four years prior. The relative concentration dipped to 3.7% as of Sept. 30 due in large measure to what the company classified as distributions.

State Farm's direct holdings of occupied real estate once led the U.S. property and casualty industry but ranked fourth-highest at the group level at year-end 2016 given the impact of its increased emphasis on sale-leaseback deals.