Interest Rate/CMBS Update - FINfacts | George Smith Partners



Volume VIII, No. 3		January 21, 2000

KEY RATE INDICES

FANNIE MAE RATES *

Prime Rate	8.50%
11th District	4.77%
3 Mo. T’s (YTM)	5.46%
6 Mo. T’s (YTM)	5.81%

5 Yr. U.S. T’s	6.63%
7 Yr. US T’s	6.70%
10 Yr. US T’s	6.77%
30 Yr. US T’s	6.70%

LIBOR - 1 mo.	5.81%
LIBOR - 3 mo.	6.06%
LIBOR - 6 mo.	6.25%
LIBOR - 1 yr.	6.66%

Tier 2+ (80% LTV)	8.46%
Tier 3+ (65% LTV)	8.31%
Tier 4+ (55% LTV)	8.11%
10 yr. term/30 yr. amort.


TRANSACTION OF THE WEEK ! $13,700,000 Forward Commitment for a 60,260 Sq. Ft., Institutional Quality Medical Office Building in Beverly Hills: The Property: 3-story, 95% leased, all doctors/clinics, built in 1991. Loan went into application and rate locked on 4/22/99 as a forward commitment and funded on 1/19/2000. There was no additional charge for the forward commitment. Rate was locked at a 225 spread over the then 5.20% 10-year Treasury with a 360/360 amortization calculation. Loan was originated by a Wall Street conduit for private securitization to a single Pension Fund client, allowing the lender to be flexible and giving GSP the opportunity to negotiate customized deal terms and structure. The mortgage rate was locked in early 1999, as a strategy by the borrower to wait out the lock out period on the prior loan, which opened up for a par prepayment penalty in early January, 2000. Customized Deal Terms Negotiated by GSP: (1) No escrows for property insurance as long as bills are paid current; (2) Minimal TI and leasing reserves deposited in the form of a Letter of Credit. Borrower pays for ongoing re-leasing costs out of property cash flow; (3) Non-monetary default, notice, right to cure, and foreclosure language which are less onerous to the borrower than standard CMBS documentation; (4) Lender waived the standard lockbox requirement (it is usually triggered by a 1.10 DCR), instead requiring a lockbox only in the event of a monetary default. Terms: (1) Rate: 7.45%; (2) Term/Amort: 10/30; (3) LTV: 75%; (4) DCR: 1.27; (5) Non-Recourse. (Michael Schwartz and George Smith)

$5,600,000 (80% of Cost) Construction Financing for 20-Unit Condominium Project in West Hollywood: Located in the historic Crescent Heights district, this Spanish Revival complex will feature a labyrinth series of courtyards with lush landscaping and "seven fountains" scattered throughout. The complex is walking distance from shopping/entertainment on the Sunset Strip. It was unanimously approved by the West Hollywood City Council. The units will average approx. 1,500 s.f. and include dramatic outdoor living space (private patios, balconies and rooftop decks), two-story floor plans, top grade kitchen appliances, etc. Cyberspace Angle: All units will include a private office with high speed broadband internet access. GSP arranged uncovered construction financing with a Midwest-based bank. The financing includes partial release provisions and extension options. Note: This is the "sister project" to the 14-unit condo refinance featured in our 12/23/99 newsletter. Terms: (1) Rate: Prime + 0.5%; (2) Loan-to-Cost: 80%; (3) Lender Fee: 1.0%; (4) Recourse. (Andrew Levant)

Interest Rate/CMBS Update: Treasuries: How were the experts so wrong? Many economists forecasted Treasury yields in the 5.50%-6.00% range for late 1999/early 2000. Today’s 10-year T closed at 6.77% after reaching a two-year high of 6.80% this morning. Economists were focused on the supply/demand dynamics of the Treasury market. With record budget surpluses, the U.S. Government is borrowing less. The short supply of Treasuries should be raising bond prices and lowering yields. What the economists didn’t count on was the longest economic expansion in U.S. history. The length and robustness of the expansion has prompted the Federal Reserve to a tightening bias. Three .25 rate increases are expected this year by the Fed. This has created massive selling in the bond market. Greenspan’s hawkish comments last week indicated that he is extremely focused on the tight labor market and is convinced that Fed must raise rates to stave off wage inflation. Many market watchers are hoping that Greenspan hikes the discount rate by 0.50%-0.75% at the Feb. 1^st meeting instead of several gradual hikes which will "prolong the pain". Next week’s Employment Cost Index (4^th Quarter 1999) Report is going to be very closely watched (Thursday). Capital is also gravitating towards equities (stock markets), where the return on investment is highest. The return ratio for Treasury bonds in 1999 the lowest in years and 2000 has started even worse… Why is the 30-year lower than the 10-year Treasury? This is the first time this has occurred for longer than a single day since 1990. (1) Supply/Demand: 30 year bonds issuance has been curtailed by the government as they are the first instruments to benefit from government surpluses; (2) Corporate: 10 year bonds compete directly with corporate issues; (3) "Trend Status": Traders are profiting from spread inversion by selling the 10 year short and buying the 30 year; (4) Higher Fed Funds: Rates affect the 10 more than the 30. CMBS: The first pool of 2000 (Standard Conduit: Approx. $800 million) went to market this week. Demand was high as 10-year AAA’s priced at T + 113.5%, the lowest since early 1999. All issues were oversubscribed as demand for CMBS is high. With Treasuries yields up, the overall coupon of approx. 7.90% is extremely attractive for a AAA instrument. Spreads tightened for all classes down to BBB- (which is all that has been reported so far). Price talk on upcoming pools is equally bullish. Stay tuned.

* GSP is the exclusive L.A. correspondent for ARCS Commercial Mortgage, the nation's largest FNMA/DUS originator.

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