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| Volume VIII, No. 45 |
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November 17, 2000 |
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| KEY RATE INDICES |
FANNIE MAE RATES * |
| Prime Rate |
9.50% |
| 11th District |
5.548% |
| 3 Mo. T’s (YTM) |
6.34%
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| 6 Mo. T’s (YTM) |
6.32% |
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| 5 Yr. U.S. T’s |
5.67% |
| 7 Yr. US T’s |
??? |
| 10 Yr. US T’s |
5.70% |
| 30 Yr. US T’s |
5.77% |
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| LIBOR - 1 mo. |
6.62% |
| LIBOR - 3 mo. |
6.75% |
| LIBOR - 6 mo. |
6.70% |
| LIBOR - 1 yr. |
6.67% |
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| Tier 2+ (80% LTV) |
7.70% |
| Tier 3+ (65% LTV) |
7.55% |
| Tier 4+ (55% LTV) |
7.35% |
| 10 yr. term/30 yr. amort. |
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TRANSACTION OF THE WEEK!!!
$5,580,000 (82% of Total Project Costs, 39 Days From Appl. to Funding) Acquisition/Reposition Financing for 90 Unit Apartment Complex Plus Adjacent Land Parcel: This building is next door to the one featured in last week's FinFax (Fannie Mae transaction). The 95% occupied property features rents at 40-50% below market. The same borrowing entity purchased this property and land parcel on which they plan to construct 46 new units. Property Specs: (1) Mid-1960's construction; (2) 90 units: 32 singles, 48x1BR, 8x2BR; (3) courtyard configuration around swimming pool with "catwalk" hallways; (4) 2-story walk up; (5) 60's vintage flat roof; (6) covered parking; (7) laundry room; (8) balconies or patios with most units. Acquisition/Reposition: (1) Purchase price: $5,400,000 (includes building and 55,000 s.f. land parcel); (2) Additional Disbursements: $1,393,600-includes exterior remodeling (facades, landscaping, courtyard, parking, etc), interiors (innovative kitchen redesign, new appliances, carpet, cabinetry, etc.), tenant relocation, etc. Financing: (1) Pricing: Prime + 1.00%; (2) Loan to Costs: 82%; (3) Term/Amort: 2 years/interest only; (4) One 6-month extension; (4) Non-recourse; (5) Lender Fee: 1.0%; (5) Mini-Perm option at stabilization: 6-month LIBOR + 1.75%, 10/30, 1.0% lender fee. (Steve Bram, David R. Pascale, Jr.) (Steve Bram, David R. Pascale, Jr) |
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| Presentation Made By Gary Schlossberg, Senior Economist, Wells Capital Management, Wells Fargo Bank, San Francisco, California to the Annual Real Estate Meeting of the AICPA, Las Vegas, Nevada on November 16, 2000: (1) Economic growth is slowing to 2 ½% - 3%, down from 5.5% levels of recent years; (2) Spending is slowing but "not falling out of bed"; (3) Fed acknowledges slowdown but continues to show inflation bias ("surprising"); (4) Consumer spending is the "gorilla component" of US economy: 2/3 of total demand. Consumer spending is growing @5.5% while income grows @ 3.0%. Gap is made up by increased debt or savings absorption; (5) Inventories are growing, portending slower manufacturing; (6) Favorable interest rates due to bond market rally reflects the anticipated slowdown; (7) Housing refinances are up, fueling spending; (8) New home construction and remodeling act as economic multiplier due to big ticket spending items; (9) Prediction on Treasuries: March 2001 10 yr T in 5.6% range with virtually flat yield curve from 5-30 yrs. (10) Fed surplus will widen due to gridlock with new congress: no big tax cut if Bush wins, no big spending if Gore wins. Potential Risks: (1) Technology setbacks. However, tech represents less than 10% of total manufacturing base in the US; (2) Manufacturers must continue to invest in high tech to keep raising efficiency, interest rate spikes will hurt; (3) Capital markets liquidity squeeze; (4) Fuel costs/availability: can be a problem long term, Wells does not see near term problems; (5) Trade Gap: Dependence upon foreign capital; (6) Post election government: Outlook is for gridlock, "Just stand there and don't do anything" - mantra for a good bond market. Schlossberg complemented Clinton's "back door stealth" ability to tweak regulatory areas to accomplish change. Real Estate: (1) Office and Retail construction have been at very strong levels over the past 3 years; (2) Factoring out dot.com phenomena/downsizing, overall office market continues to perform well; (3) Wells sees some minor signs of late cycle real estate excesses; (4) Vacancy factors will increase in some markets due to loosening of discipline; (5) Schlossberg describes real estate as in the "yellow flag" part of cycle. Summary: Subdued inflation, soft landing, no recession, slightly lower rates, risks are possible but not apparent at this time. (George A. Smith) |
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CMBS B Piece Buyer Speaks! After hearing about B piece buyers and their influence over originators and lending policies over the years, we finally were briefed by top executive of major capital group this week: (1) "B piece" definition: BB and below; (2) On a typical $800,000,000 pool, it costs $500,000 to underwrite the B piece; (3) Typically, B piece buyer buys BB, B and unrated. Then sells the BB and B to a pre-negotiated buyer and retains unrated strip and the master/special servicing rights and fees. Usually they make their investment back within 3-4 years, and the remainder of the 10 year term is "gravy". That is assuming little or no defaults since they are in "first loss" position. (4) When looking at a pool: they deduct 20% of the income "off the top" as a stress test, do a quick valuation, look at the "Rosen Clock" which charts the cycle for the product type/market area, run checks on borrowers/tenants, etc. They often ask for the right to "kick out" up to 40% of the loans; (5) Diligence period: BBB and above: 3 days, BB and below: 3 weeks. (6) Red flags: dot com tenants, health care, limited service hotels; Note: Most loans of under $5M fly "under the radar screen" (7) Personnel inspect the collateral. Horror Stories: Mall with no anchor as represented in the rent roll, just a government processing center….Industrial building w/billboard representing a major portion of the income (billboard was blank); (8) Engineered instrument watch: "Out": Re-Remics which were B-pieces from different pools, banded together and then re-tranched to create new bonds: AAA, AA, etc. Reason: Investors look at it as junk from junk, "In": CBO's (Collateralized Bond Obligations): 40% CMBS, 40% Equity REIT debt, 20% Asset Back Securities (home loans, car loans, credit card debt, etc.) Reason: Bond buyers like the diversification. (David R. Pascale, Jr)
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| * GSP is an L.A. correspondent for ARCS Commercial Mortgage, the nation's largest FNMA/DUS originator. |
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