Anthony Downs (5th Annual GSP)

$28,450,000 Interim Loan (82% Loan-to-Cost/ 77% Loan-to-Stable Value) for 378,200 Sq. Ft., 92% Occupied, Shopping Center Acquisition in Southern California: GSP arranged $28,450,000 of floating rate, interim financing to facilitate the acquisition and renovation of a 92% occupied, 378,200 sq. ft, multi-building retail center located in Southern California. Although the property was 92% occupied, this experienced developer saw an opportunity to rehab the physical plant including both exterior design alterations and remedying deferred maintenance. Redevelopment plans include re-do of the entrance of a major discount store, minor re-model of a major grocery store, relocation of a major drugstore to a corner pad, other tenant relocations and substitutions, and in general promoting and changing the image of the center. The equity investment (arranged by the borrower) was provided by a third party mezzanine institutional source that required a subordinated lien position to the subject loan. GSP's institutional lender generally disfavors subordinated liens but agreed after an acceptable inter-creditor agreement was negotiated. Financing Terms: (1) Loan Amount: $28,450,000 or 82% loan-to-total project cost (including closing costs, remodel funds, capital expense reserve, marketing reserve, and re-tenanting reserve); (2) Term/Amort: 3 years/interest only; (3) Rate/DCR: 30 Day LIBOR + 2.75% (options for 30, 60 or 90 day contracts) with monthly Debt Coverage hurdles with an overall minimum of a 1.25 DCR and a second hurdle of 1.35 DCR in years 1 and 2 and 1.42 DCR in year 3 to determine payouts to the mezzanine partner. In the event the trailing 3 month DCR falls below the hurdles, lender sweeps progressively more of net cash flow until DCR is restored; (4) Prepayment: Open to prepay except for the first six months with a .25% penalty; (5) Recourse only to the borrower but not to the members/partners except for a Completion Guaranty and a $1.5 million Limited Repayment Guaranty; (6) Lender Fee: 1.25%. (Gene Brunkhardt, Gary E. Mozer)

ATTENTION INVESTMENT SALE BROKERS - Exchange Buyer With $35,000,000 Cash to Invest is Seeking to Identify Acquisitions: (1) B+ or better, (2) apartments, industrial, office or retail, (3) western United States, (4) value added OK. Can buy all cash. Will cooperate. One week to specify. Contact Gary M. Tenzer at ext 103 or gtenzer@gspartners.com

Interest Rate/CMBS Update: Huge bond market rally this week: (1) Monday: NAPM Index released indicated benign growth, not too hot; (2) Tuesday: Personal income report released was "Unchanged"; (3) Wednesday: Fed Reserve "Beige" book, Washington Post article (economic survey) and Factory orders (down 0.9%) gave significant evidence of a slowing economy with very little inflation danger; (4) Thursday/Friday: Employment report indicating dangerously low unemployment at 4.1%, however, the wage inflation index rose only 1 cent, indicating virtually zero wage inflation at full employment. The 10-year T closed at 5.91% continuing a two-week rally in which it has dropped almost 30 bps. CMBS: (1) The market is showing renewed strength as the latest conduit issue’s 10-year AAA priced at + 136 while the secondary market is trading down in the low + 130 range for the same tranche; (2) Several issuers are increasingly bullish about going to market in late November and even early December as the major Y2K fears are subsiding slightly as we enter mid-November; (3) Originators have received indications from bond buyers that predictions of zero liquidity and buyers sitting on the sidelines may prove to be unfounded. However, mid to late December still looks to be unusually quiet. Over $10 billion in new issues are expected to price in the next 30 days and buyers appear to be plentiful; (4) Several originators are increasing an emphasis on new floating rate loans, either beefing up existing pipelines or starting new programs. Quote: "It has been available for big deals but we are seeing the return of retail floating rate transactions in the $3 million and up range" Stay tuned….

Anthony Downs (5^th Annual GSP Real Estate Luncheon): US Economy: (1) US economy is in 9^th straight year of expansion, record prosperity; (2) Year 2000: Strong growth, possible higher inflation due to tight labor; (3) Consumer spending is main engine, consumers are spending more than their incomes, personal savings rate is negative—offset by government surpluses. Also offset by stock market gains; (4) The real growth rate is vulnerable to a sharp drop in stock prices which will cause a cutback in consumer spending; (5) Are stocks overvalued? Downs: "I believe there is a non trivial chance of a significant fall in stock prices in the year 2000"; (6) If stock prices drop, watch for the Fed to cut rates; (7) Note: The 1987 500 point crash did not stop the economy from growing; (8) International: Good news as Asia recovers quicker than expected (including Japan). Europe is recovering, but with higher unemployment rates; (9) Productivity has increased due to computers and other tech factors, offsetting the labor shortage, however: "I think wages will rise somewhat in the year 2000"; (10) "Has there been a basic shift in the US economy making it less susceptible to recession?" Factors in Favor: Globalization, internet, overcapacity in commodity production, "lean perfection", i.e. layoffs/efficiency within companies; (11) Factors Against: Dependence on US consumption in relation to US production requiring massive borrowing from abroad, also trade deficit running at 3-4% of GDP, over expansion during the boom, tendency to overprice future profits; (12) "These factors have not eliminated the likelihood of down turns all together, but they have increased the percentage of the time that we will be prosperous versus the percentage of time we will be in the recession compared to the past."; (13) Forecast: Solid growth in 2000 w/ no major inflation, the Fed will be forced to start a recession by raising rates sharply. Real Estate: (1) Further increases in demand for space, all product types. But the peak has passed; (2) Supply is critical, overbuilding is tempting during this part of the cycle; (3) Russian default crisis of 1998 slowed financing and building down, although it had nothing to do with US real estate dynamics. Did this show the wisdom of public capital market investor’s (REIT’s and CMBS) as opposed to traditional local developers and lenders of the past? Advocates stress that public markets are more efficient in allocating and shutting off capital according to market forces. "Can developers restrain themselves when they have an opportunity to overbuild and can get financing?"; (4) CMBS: Requiring more equity than they did last year, much new development is being debt financed from traditional sources: Insurance companies, banks, etc.; (5) Overbuilding will become more widespread during 2000, developers can construct faster than demand rises. In the 1980’s: New commercial construction exceeded 1 billion s.f. for only 3 years: 1985, 1986, 1987. During the 90’s there have been 3 such years: 1997, 1998, 1999; (6) 2^nd Quarter 1999: Suburban office vacancy rates rose in 75% of markets, industrial construction in 1998 and 1999 was double that of 1997; (7) Information: There is more information about trends and vacancy, etc. available to builders and lenders today. However, the driving factor in overbuilding both in the 80’s and today appears to be ego; (8) Advice to Developers/Lenders: "Look before you leap"; (9) Public and Private Capital Markets: REIT grew spectacularly during the 1990’s. However, recent REIT share prices have lagged behind stock equities even though the properties have been doing exceptionally well. REIT’s access to capital suffered dramatically since fall 1998 when stock prices dropped, floating new equity issues is prohibitively expensive. So most REIT shares are now discounted below their net asset value prices; (10) New Changes: Shift in equity ownership from traditional developers with long hold horizons to stock investors with short horizons (shareholders). These investors are comparing real estate with the entire world of investment, including .com’s, steel-mills, industrials, etc.; (11) Comparing Real Estate with Other Investments—Interesting Statistical Analysis: Since 1987: Value increases by property type, per square foot: Office +0% (office fell dramatically then rebounded back to 1987 levels), Apartments +51%, Neighborhood shopping centers +10%, Industrial +19%. In the same period: S&P Stock index +287%. In 1990 the total value of all corporate equities and the value of all commercial real property stood at app. $3.5 million each. However, in mid 1998, corporate equities have zoomed to $14.5 trillion, a 311% rise. In contrast all commercial real property rose only slightly: From $3.5 to $3.7 trillion…. as of now corporate equities are 4x as valuable as all commercial real estate. (12) Stocks have replaced real estate as the major repository of household wealth. (13) Real estate performance levels are holding down REIT share prices compared to internet, industrials, etc. "A return of REIT share prices to net asset values are by no means a certainty". Equity REITs are in two businesses: One involves managing and operating real estate, the other involves manipulating all the factors that affect share prices such as massaging stock analysts, big investors, tout sheets, etc. (14) Is the future for real estate bleak? No! The US population continues to grow, so we will still lots more commercial properties of all types in the future. Our population is scheduled to rise by 47 million people in the next 20 years, that’s the same gain in population we experienced from 1980 to 2000. Population growth will be more dramatic in California, who in the 1990’s exported middle class households while importing the same number of poor, immigrant households. This trend has ended and California’s middle class is experiencing a fast growth rate. Overall: "…. Commercial properties can still be very profitable if planned right, financed right and timed right, even though the industry as a whole will not enjoy colossal expansion. So, I'm not a pessimist at all, I'm just warning you to be cautious at this phase of the cycle."