Steven Slifer, Chief Economist

TRANSACTION OF THE WEEK!!!

$65,000,000 Non-Recourse Construction Loan for Mixed-Use, Multi-Phase, Speculative Development: GSP has arranged a $65,000,000 non-recourse construction loan for an approximate 450,000 sq. ft. mixed-use development located in northern California. The loan will be used for the development of Phases I & II of the three-phased development. Project Specs (Phases I & II): Approx. 450,000 sq. ft., mixed-use development featuring: (1) 9-story, 330,000 s.f. class "A" office building with 40,000 square foot floor plates; (2) Entertainment Component: Regional and local restaurants, state of the art multiplex theater, fitness center; (3) Parking structures (with over 1,800 spaces) that will accommodate parking for the entire project; (4) Open-air, contemporary plaza. Financing Challenges: Borrower required: (1) A lender with the capacity to fund the entire loan without need for participation or syndication; (2) a lender that would accept a completion guarantee only, no repayment guarantee; (3) a lender that would commit and fund without requiring any pre-leasing of the office component (some of the retail was pre-leased); (4) a lender that would allow a sizable mezzanine loan to complete the capital structure. Terms: (1) Loan Amount: $65,000,000; (2) Loan-to-Cost: Approx. 60.00%; (3) Interest Rate: 30-day LIBOR + 2.55%; (4) Loan Term: 36 months, with a 12-month extension option; (5) Amortization: Interest only; (6) Liability: Non-recourse with a completion guaranty requirement only! (7) Lender Fee: 1.00%. (Gary E. Mozer, Peter Smyslowski, Gerald Price)

Steven Slifer, Chief Economist for Lehman Brothers, Briefs A-T Medical Research Foundation Executive Luncheon Participants on Wednesday, July 12: Mr. Slifer delivered an extremely upbeat talk on the present economic expansion, even suggesting that even now, 10 years into it: "we may be sitting here 10 years from now with this thing still going." (1) Clients are worried about stock market valuation, Fed raising rates, foreign account deficit-why? As the expansion enters its 10th year-people think "this is about the time when it all begins to become unglued and starts to really fall apart"; (2) Optimism: "Economists are suppose to be the doomsayers and I'm just quite the opposite." (3) Inflation is in check for a while; (4) Business is not reacting as it did in the 70's/80's-back then they passed cost increases on to the consumer….now "business people don't seem like they have…the ability to raise prices. Every CEO, CFO that comes trotting through my office gives me same story." Consumers are more price sensitive than they were due to K-Mart, Wal-Mart, Home Depot, etc. Now Bloomingdale's and the like are responding with more sales-"over the last year, prices of goods sold in department stores have dropped 5%." This is very significant because retail sales figures are high. Even in the extremely hot auto sector: car sales are the best in 20 years, prices are flat or declining due to the battle for market share; (5) Internet retailing: "We went out and did a survey of one hundred items that show up on the Internet. The average discount for those things was between fifteen and twenty percent, right?" Also, no sales tax. E-Commerce is now 1-2% of retail sales, however, these sales are doubling every year for the foreseeable future, further eroding the pricing power of traditional businesses. "This is going to be something that keeps inflation in check for a long, long time to come." (6) Cost cutting: Globalization-businesses set up anywhere with favorable labor costs and tax rates; (7) Internet B2B: Business to business leads to extraordinary cost savings. Example: GE realized that global competition was forcing them to lower prices on many finished products approximately 4-5% per year. They responded by eliminating all traditional suppliers, buying all materials over the internet. In 4 years they cut costs by 30-40%, an enormous savings. End result: GE cuts prices and increases profits, "astounding". Recent Commerce Department survey: 2/3 of manufacturing firms have not used any B2B technology yet. "This thing has got a long ways to go before it taps out." (8) Investment in technology is making employees more efficient; (9) Productivity has been steadily rising since 1994. "We have been arguing for some time that whatever productivity growth is today, six months a year from now, guess what? It's going to be faster." Significance: This raises the "economic speed limit", the potential growth rate for the economy. If the labor force grows by 1% and productivity grows by 4%, the sustainable growth rate is 5%, well above traditional economic standards which have been 2-3% at the most. This keeps wage inflation in check: as wages go up in line with productivity, prices don't need to be raised to sustain profitability. "Unit labor costs" remain stable. (10) Productivity boosts corporate earnings in the stock market, allowing corporate earnings to rise above and beyond GDP growth; (11) Business cycles: "This thing has legs, its going to be around for a while, and yeah, it has been a long expansion so far, and you know what? It just might last a lot longer. There are none of the imbalances that typically precede the short circuiting of the business cycle." Historical perspective: From 1850-WWI, business cycles averaged about 4 years (2 up, 2 down), expansions and recessions were about the same length of time. Now the 3 longest business cycles in history have occurred since 1960: the 60's up to 1974, the 80's (after 1982), now the entire 90's through today and beyond. The last big recession was from 1980-82, since then 18 years of expansion with one 8 month "mini recession" in the middle; (12) Closing comments: "Have we gotten to the point where we've eliminated business cycles? I can't be an economist and get up here and say we've done that, but we certainly seem to be doing a pretty good imitation of it… but how long is it going to go? I don't know. From your viewpoint, as real estate investors and owners, you guys, I think, you all should be looking at a world that's going to continue to be pretty good for your business. You know, real estate prices I presume will continue to grow up, continue to grow sort of modestly in excess of inflation. But I think the risk of the Fed kind of going nuts and pushing us over the edge is pretty slim and it will obviously be catastrophic for your business. The odds on us going into recession is also I think pretty slim." (David R. Pascale, Jr.)

HOT MONEY!!!

CMBS Lender Underwrites to 1.05-1.10 DCR for Fixed Rate Perms on Properties in "Lease-Up" Stage: This program eliminates the need for earn-outs, holdbacks, and bridge to perm for certain transactions. For apartments, industrial, or retail properties that are expected to stabilize within the next 6-9 months, the lender will do the following: fund a 10 year term/30 year amort, fixed rate loan (standard conduit transaction) based upon a 1.20-1.25 DCR at projected stabilized cash flow, as long as the loan underwrites to a 1.05-1.10 DCR at today's cash flow. No holdbacks! The lender is taking the real estate risk and funding the full loan immediately. Cost: 15 extra bps in rate above the standard matrix. Call for more details.