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| Volume VIII, No. 17 |
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April 28, 2000 |
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| KEY RATE INDICES |
FANNIE MAE RATES * |
| Prime Rate |
9.00% |
| 11th District |
4.967% |
| 3 Mo. T’s (YTM) |
5.81%
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| 6 Mo. T’s (YTM) |
6.09% |
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| 5 Yr. U.S. T’s |
6.55% |
| 7 Yr. US T’s |
??? |
| 10 Yr. US T’s |
6.22% |
| 30 Yr. US T’s |
5.95% |
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| LIBOR - 1 mo. |
6.20% |
| LIBOR - 3 mo. |
6.40% |
| LIBOR - 6 mo. |
6.61% |
| LIBOR - 1 yr. |
6.96% |
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| Tier 2+ (80% LTV) |
8.26% |
| Tier 3+ (65% LTV) |
8.11% |
| Tier 4+ (55% LTV) |
7.91% |
| 10 yr. term/30 yr. amort. |
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TRANSACTION OF THE WEEK!!!
$25,825,000 (97%+ of Total Financing to Project Cost) Acquisition/Reposition Senior Bridge (78.2% of Total Cost) and Equity Financing (18.8% of Total Cost) for 400-Unit Apartment Complex on Unsubordinated Ground Lease: GSP arranged $5,017,000 of equity (or 87.00% of total equity requirement) and $20,808,000 of non-recourse senior bridge financing (78.2% of total project cost) for the acquisition and reposition of a 400-unit apartment complex in South Orange County, CA. The Property: 400-units (12% studio, 40% 1 bd./1 bath, and 48% 2 bd./2 bath) subject to a 55 year ground lease (40 years remaining), 25 two-story buildings (plus clubhouse), 23.3 acres, built in mid-1980's, gated, pools, spa & sauna, fitness center, clubhouse center, covered parking. Unit amenities include: Central air & heating, dishwashers & microwaves, walk-in closets, large private balconies and/or patios. Issues: The property is subject to a 55-year unsubordinated ground lease (40 years remaining) to a municipality. The ground rent is paid once yearly, with the payment due 2 weeks after loan closing. As part of the capital structure, the senior lender included the ground rent payment as part of the holdback. The ground rent increases 4.75%/yr. (many lenders declined due to the size of the ground rent payment and the rate of increase over the life of the lease). The Market/Location: Premier in-fill location adjacent to upscale bedroom communities, adjacent to recently renovated area mall with excellent freeway access and area has virtually no vacant or entitled multifamily housing land available for future development. Sub-Market Occupancy: 95%+. Reposition: Borrower will renovate and modernize the project and raise rents to market. Unit rents are $170.00 below market on average. Capital Structure: (1) Purchase Price: $21,225,000; (2) Renovation, Working Capital Reserve, Interest Reserve, Contingency, Closing Costs, 1st Year's Ground Rent: Approx. $5,400,000; Total Capitalization: Approx. $26,625,000. The Financing - Senior Debt: (1) Loan Amount: $20,808,000 (approx. 78% of total cost); (2) Rate: LIBOR + 2.90%; (3) Term: 3 years plus 1-2 year extension option for 0.50% fee; (4) Interest only first 2 years, then 30 year amortization; (5) Non-recourse; (6) Lender Fee: 1.0%; (7) Prepayment: Year 1 - 2.00% fee; year 2 - 1.00% fee; year 3 - 0.50% (last 6 months prepayable at par). Equity: (1) Amount: $5,017,000; (2) Terms: Confidential. (Gary E. Mozer, Lee T. Norman) |
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CMBS UPDATE
Originators Considering New Risk Based Pricing Structures in Response to Market Volatility: Background: Several factors have led to a perceived "decoupling" of the 10-year T to the all-in mortgage rates for CMBS transactions… making the traditional T + spread pricing model less relevant to the feasibility and profitability of originating CMBS mortgages: (1) Scarcity of 10-Year Treasuries as government buybacks and reduced issuance affect supply driving the pricing artificially high…. also, the inverted yield curve has created a new dynamic: the 2-year T is now experiencing the most volatility in response to actual and/or perceived Fed Reserve actions. This makes sense as the Fed has always controlled short term rates; (2) Swap Spreads: As the treasuries supply dwindles, originators have used Swaps to hedge their positions; (3) Floating Rate LIBOR has become the worldwide capital markets benchmark as several fund managers prefer it to Treasuries, increasing dependence on Swaps. Two New Pricing Models Are Being Considered for Originations: (1) Swap Based: 10-year T + 10-year mid market Swap + Risk Based Spread. What are the numbers? (a) 10-year mid-market Swap: Approx. +117, (b) Spreads over T and Swap combined (from one major originator): Apts.: 85-96, Industrial: 95-100; Anchored Retail: 105-115; Office 110-118; What's the buzz? Pro: Swaps are the hedging vehicle of choice and adding it to the pricing removes a great deal of spread volatility: a.k.a re-trading. Con: The Swap market is not a traditional liquid securities market… it is actually a series of "one-off" deals between many different fixed and floating rate instruments. Quote from trading desk: "When I look up the Swap spread, I am trying to find the last individual trades that most approximate a 10 year mid-market Swap; it is not a regular index and the market is not 'deep'"; (2) Fannie Mae Based: 10-year FNMA debenture + Risk Based Spread: What are the numbers? (a) 10-year Fannie Mae is 7.29%; (b) Spreads over Fannie Mae: Apt. 115-132, Anchored Retail: 125-140; What's the buzz? Pro: Fannie Mae is a liquid securities market with daily trading in a mortgage based instrument which takes into account Treasuries and Swaps. Con: Fannie Mae is based on a single product type - Multifamily. It also carries a US government guarantee: therefore, in a credit crunch and subsequent "flight to quality" such as in 1998, Fannie Mae yields would drop disproportionately in relation to mortgages as buyers rush in, leading to another "decoupling". Stay tuned… (David R. Pascale, Jr.)
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| * GSP is the exclusive L.A. correspondent for ARCS Commercial Mortgage, the nation's largest FNMA/DUS originator. |
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