Comments From GSP CEO Gary E. Mozer

$1,775,000 For Leasehold Interest in 60,000 S.F. Ralph's Anchored Retail Center in Los Angeles County: This late 70’s vintage, 92% occupied center contains 11 tenants including 2 restaurants and a freestanding auto parts store. Key Issues: (1) Unsubordinated ground lease with rent increases starting in 2002 based upon re-appraisal of the land; (2) the Ralph's is a smaller 35,000 s.f. store and its lease expires in 2001; (3) unseasoned leases for new smaller tenants/lack of operating history for the center. The current owner took the property back in late 1997 from the prior owner who mismanaged the center and defaulted on a AITD wraparound loan. The new owner evicted non-paying tenants, relocated some existing tenants, performed minor rehab work and signed up new tenants in late 1998. The strength and experience of the borrower was a significant factor in making the lender comfortable with the transaction. Terms: (1) Rate: Start rate of 8.50% adjusting every 6 months to 6 mo. T + 3.50%; (2) Amort/Term: 20/20; (3) LTV: 67%; (4) DCR: 1.25 on leases in place but only 0.40 using 1998 actual NOI; (4) top 20% of the loan is recourse; (5) waiver of prepayment penalty after 6 months if the loan has never been in default; (6) Lender Fee: 1.25%. (Gene Brunkhardt, Gary E. Mozer)

HOT RATE LOCK PROGRAM! Wall Street Conduit with a Life Company Rate Lock Philosophy: GSP has identified a CMBS lender who will lock the all-in mortgage interest rate (both Treasury index and spread) upon signing of the loan application and 3% application and refundable rate lock deposit. The all-in rate is locked for 60 days. Lender offers the ability to lock the rate for an additional 30 days for a 3/8% fee if the anticipated loan closing date extends beyond the 60-day period. This lender’s docs do not contain a "MAC" (Material Adverse Change) clause, which became popular with CMBS lenders after the 1998 meltdown.

CMBS Update: Report on Presentation by Merrill Lynch Economist Roger Lehman: Mr. Lehman spoke on Wed, Aug. 25, 1999 in Century City. Quotes are from his presentation. Highlights: (1) The market has spent most of the year recovering from 1998. A comfort level set in from February-June, then Y2K fears led to a liquidity crunch and spread widening. "We believe Y2K is a non-event"; (2) More on Y2K: "Virtually no one is expected to buy bonds at the end of the year". However, some contrarians will go to market in Nov./Dec. hoping to be the only game in town. The differences between 1998 (meltdown) and 1999 (Y2K) is that this year the end is in sight, Y2K fears should end during the first week of January 2000. Also, last year featured the "flight to quality" resulting in super low Treasury yields and decoupling, this year: a liquidity crunch with Treasury yields rising; (3) SWAP spreads have a major effect on CMBS, the street watches the spread between the SWAP rate and the AAA CMBS closely; (4) Industry Volume: 1999 volume is high, just under 1998’s record (app. $80 billion). Much of this year’s volume is due to an overhang from 1998. Beginning next year, the industry should settle into a $40-$50 billion annual pace; (5) CMBS Index: 3 companies publish general CMBS indices in an attempt to allow originators to hedge spread risk. Now derivatives can be created based upon groups of pools, which should add liquidity/tighten spreads. This part of the market is developing right now; (6) Pool Makeup: Several originators weaken a pool. Best scenario is single originator or two with similar underwriting. Subordination levels are moving down indicating more conservative underwriting; (7) Pool Scheduling: Originators are holding loans for a shorter time to lessen market risk and costs, the shorter hold period leads to smaller pools; (8) Product Types: Not Hot: Limited Service Hotel, Retail…. Hot: Multi-Tenant Office. Major difference between this year and last is pools with too much special purpose were securitized with lower profit margins; (9) Loan Performance History: Rating agencies have noted that the majority of defaults are borrower related, not asset related, originators are looking at sponsorship more closely now than before; (10) Geography: Rating agencies are using more sophisticated modeling techniques for pools, with specific criteria based on performance of property types within different markets….result: different pricing for the same building in different areas: "San Francisco office spreads are tighter than Houston office spreads"; (11) Fusion pools are out of favor (mixing very large, $75MM and up, with the standard size loans), originators prefer to securitize large loans in single asset pools. Also, any single loan at or over 7% of the total pool receives a great deal of scrutiny by the rating agencies. Originators like to keep that maximum at 5%; (12) Trend: Watch for more CMBS of loans originated outside the USA (Canada, Europe, Japan) 1998 Volume: $600 million; 1999: Multi billions. (Gerald Price, David Pascale)

Comments From GSP CEO Gary E. Mozer Regarding Reposition Opportunities/Where We Are In the Cycle: Lately, Gary has observed that the "low hanging fruit" is gone, i.e. quick turnaround/large value creation opportunities. Those deals were ideal for the "Pacman" equity funds. The opportunities now are in properties with below market leases, which require more patient money, i.e. pension funds, and others requiring lower cumulative preferred returns.