Interest Rate/CMBS Update

TRANSACTION OF THE WEEK

$16,291,600 (83.7% of Cost) Construction Financing for 208 Unit Apartment Complex: This Rocky Mountain area "woody-walk-up" consists of 26 separate 2-story, 8-plex properties sprawled over 15 landscaped acres. The low-density project features a clubhouse w/ Surround Sound theatre, 1,200 s.f. resort style pool, spa and fitness center. Other amenities include 3 separate picnic/recreation areas and a "tot lot". The units themselves are built to condo specs - most are 2 or 3 bedrooms with patio/decks, high ceilings, dishwashers, double sinks, 18 cubic foot refrigerators, fireplaces, etc. All units have private entry direct from the outside. GSP arranged 83.7% of total cost financing with a bank with a forward commitment committed, but not fully documented. Terms: (1) Rate: 30-day LIBOR + 1.75%; (2) Loan Term: 18 months with a 6-month option/interest only; (3) Completion guarantee only; (4) Loan-To-Cost: 83.7%; (5) Lender Fee: 0.5% (Gary E. Mozer, Gerald Price)

$13,620,000 (7.73%, 360/360) Forward Funding Commitment for a 60,257 Class A, 3-Story Medical Office in Beverly Hills Near Cedar Sinai Hospital, Family Owned and Family Managed: Forward commitment on August 4, 1999 for a funding date any time before January 31, 2000. GSP negotiated highly customized deal terms with respect to non-monetary default, borrower’s rights to cure, cash flow lockbox requirements in the event of a monetary default. We pushed the envelope with the lender with respect to these terms, the interest rate spread and amortization. We also negotiated minimal non-refundable deposits required of the borrower and a "pre-close" deadline of 75 days. Lender is a pension that is doing a "private label" securitization, where they purchase all the bonds upon securitization for better liquidity reserve requirements per their regulators. Terms: (1) Rate: 7.73% (5.88% T + 1.85%) 360/360, on-the-run; (2) Term/Amort: 10/30; (3) LTV: 75%; (4) DCR: 1.27; (5) Non-recourse; (6) Lender Fee: Par. (George Smith, Michael Schwartz)

Interest Rate/CMBS Update: Treasuries: Trader’s took comfort in Tuesday’s CPI report indicating low inflation, spurring a rally which saw yields drop 10 bps. this week to 5.88%. Volume has been light, attributable to (1) Vacation for many traders/investors, and (2) a wait and see mode prior to next Tuesday’s Federal Reserve meeting. The Fed is expected to raise short term rates 0.25%. CMBS: (Quotes are from originators we spoke to this week): (1) The $1.4 billion major bank originated pool cleared the 10-year AAA’s at T + 154, spreads have compressed 20 bps from last month’s high. "The spreads at T + 176 were an overreaction to Y2K, even those high priced bonds immediately began to trade in the secondary market at app. T + 150-160. The market seems to have set the liquidity premium at app 25 bps". We love it: The latest buzz expression on the street is liquidity premium, meaning the extra yield originators are paying to attract bond investors leaning towards holding more cash during the second half of 1999. (2) "The investment grade credit curve is flattening": The range between AAA spreads and BBB- have narrowed over the past few months, with lower classes accelerating upward slower than the higher ones. (3) Grande loans are back: Originators are once again quoting and closing large loans in the $100 million range, but with a twist. They are now underwriting a low LTV senior piece called investment grade. (Meaning that all CMBS bonds originated based on the senior piece are rated BBB or better.) The originator then writes a mezz loan in order to bring the proceeds up to 70-75% depending on the transaction. "The difference between now and last year is there is a higher weighted cost of funds for the lender in writing a grande loan. The difference in a $10MM loan between this year and last year is app 50 bps more, for a $150 million loan it has gone up 70-90 bps higher because the lender now has to find a place to execute the mezz piece." (4) Low LTV loans are being priced at very low spreads ("off the matrix"): Large low LTV transactions (LTV 60% and under, DCR over 1.50, loan amount over $10MM) are being priced very competitively because their presence improves subordination levels in the overall pool. Lenders are competing hard for these deals, especially if the asset is of institutional quality. (5) B piece buyers are getting scarce and picky: "Those with the ability to underwrite have very little cash, those with cash do not have the underwriting capacity". "B-piece buyers are getting particular since they are in first loss position. They are going through the pools loan by loan, sometimes asking for a loan to be removed." The situation has not reached meltdown panic level yet, but some originators are rumored to have held on to their B-pieces in recent securitizations. (6) "The 4^th Quarter ends on November 15^th": Many originators are indicating they don’t mind going to market in the 4^th Quarter, as long as it’s in the first 45 days, the end of the year is going to be dead with investors sitting on the sidelines. (7) What’s coming up?: Mostly single borrower pools, no standard conduit issues are expected until early September. Stay tuned….