Overview of the Week (4/2/2001-WSJ)

KEY RATE INDICES FANNIE MAE RATES * Prime Rate 8.00% 11th District 5.426% 3 Mo. T’s (YTM) 3.93% 6 Mo. T’s (YTM) 3.93% 5 Yr. U.S. T’s 4.47% 10 Yr. US T’s 4.88% 30 Yr. US T’s 5.46% 12-MAT 5.711% LIBOR - 1 mo. 5.05% LIBOR - 3 mo. 4.80% LIBOR - 6 mo. 4.60% LIBOR - 1 yr. 4.56% Tier 2+ (80% LTV) 6.97% Tier 3+ (65% LTV) 6.79% Tier 4+ (55% LTV) 6.59% 10 yr. term/30 yr. amort. TRANSACTION OF THE WEEK $15,700,000 (95.15% of Total Project Cost) Non-Recourse Acquisition and Development Financing for 49 Artist's Loft Condominiums in Venice Beach: GSP has arranged 3-tiered, non-participating, structured financing for this to-be-built "Artists in Residence" development. The property is located 2 blocks from the ocean and just south of the Santa Monica border on Main Street -- "ground zero" of the Venice artist community. Project Specs: (1) 4 buildings around central courtyard featuring performing arts space and kiln; (2) 49 for-sale, live-work artist lofts; (3) 23 1-story flats and 26 multi-level units -- ranging from 1,100-1,900 s.f of flexible interior space plus private patios, balconies and rooftop decks; (4) High tech architecture conforms with area's mix of eclectic and traditional development; (5) 3,200 s.f. of spec ground floor retail/commercial space. The Financing -- Senior Construction Debt (80% of Cost): (1) Tranche A: $11,000,000, Prime + 1.0%; (2) Tranche B: $2,200,000, 20% fixed rate; (3) Term/Amort: 18 months/interest only w/ 6-month extension option; (4) Non-recourse; (5) Lender Fee: 1.5%; (6) Partial release provisions. Mezzanine Debt (75% of Equity Requirement): (1) Amount: $2,500,000, (2) Term: 2 years; (3) Rate: 25% IRR ("look-back"); (4) Lender Fee: 1.0%, (4) Non-recourse; (5) Secured by partnership interest; (6) Partial release provisions. (Andrew Levant) $2,400,000 Acquisition Loan For Unanchored 34,000 s.f. Shopping Center In Scottsdale, AZ. This CMBS Loan Closed In 35 Days From Application To Funding: Motivated buyer had the opportunity to purchase an undervalued property. Specs: Built 1985, 18 tenants, 96.5% occupied, app 3 acres. The appraised value came in higher than the purchase price and the CMBS lender allowed the requested loan to be increased based on the appraisal. There is additional upside value and increased cash flow with a number of tenants having below market rents with rollover and/or stepped up rents in the next 24 months. Challenges: (1) Quick close to meet buyer and seller requirements; (2) Unanchored center with major tenants being a local sports bar and a regional pizza chain; (3) Borrower required environmental carevout to be recourse to an entity; (4) All new 3rd party reports had to be obtained; (5) Environmental review required additional testing to determine if an adjacent closed gas station had caused any soil contamination. Terms: (1) Loan Amount: $2,400,000; (2) Rate: 10 yr. T + 2.40%; (3) Term/Amort: 10/30; (4) Loan-To-Value: 75%; (5) DCR: 1.45; (6) Non-recourse with environmental carveout to an entity; (7) Lender Fee: Par. (Gene Brunkhardt) OVERVIEW OF THE WEEK Overview of the Week We Feel is Worth Sharing (4/2/2001-WSJ) (1) We love this quote: "Commercial real estate has a reputation for being the drunk driver of economic highways, the sector whose periodic crackups wreak havoc on other industries". (2) Real Estate is Not Leading This Downturn: In previous economic downturns, an unhealthy commercial real-estate climate sometimes ignited and at other times exacerbated the broad economy's woes. Now, a healthier climate could have the opposite effect -- helping to brace a weakening economy. (3) Supply and Demand Are Largely in Balance: By real estate's past logic, numbers like these would be viewed in the industry like green lights at a drag strip: Rents nationwide rose 12.5% in 2000, while vacancies continued a decade-long drop to 8.3% from 9.5% from a year earlier, according to J.P. Morgan Fleming, a unit of J.P. Morgan Chase & Co. (4) New Office Supply is Reasonable Relative to Projected Demand: But projected new office supply for the nation is running only slightly ahead of projected demand -- a Credit Suisse First Boston study puts it at 0.18% ahead for the next 18 months. That's not bad, especially compared with the early 1980s, when supplies grew faster than demand for years, peaking at 4.6% faster in 1982 -- a huge disparity that piled up oversupplies so big they continue to haunt cities like Dallas. (5) Most Markets Will Not See Major Repositioning of Rental Rates: Outside of San Francisco, many businesses hoping the economic slump would result in crashing rents will be disappointed, although rents have come off their peaks and are likely to fall further if the economy continues to weaken. In Boston, office rents rose 19.5% in 2000 to roughly $60 per s.f., but rose just 2% in the fourth quarter as one million square feet of sublet space returned to the market, upping the vacancy rate to above 4%. This year, rents in Boston are expected to stabilize or post moderate declines. (6) Why are things different this time? The '80s real-estate story was written more by the government than is perhaps widely understood. The 1981 Economic Recovery Tax Act drastically cut depreciation schedules, providing huge write-offs on even small real-estate investments. The next year's Garn-St Germain Act opened thrift coffers to risky investments such as commercial real estate. Those twin engines helped blast office-building completions up 30% nationally in 1982 to 111.6 million square feet from the prior year. (7) Why Are the 90's Different Than the 80's: The 1990s brought changes. Thrifts and Japanese investors are now gone. Commercial banks have reduced their appetite for construction lending and apply much more stringent underwriting standards. And, publicly traded real-estate investment trusts now own more than 15% of all U.S. income-producing property, while commercial mortgage-backed securities provide about 19% of the real-estate industry's debt. The two industries, insignificant or nonexistent a decade ago, have spawned a small army of analysts watching the industry's every move. (8) That's not to say the future is without risk. Analysts estimate that 179 million square feet of office space is expected to come on line in the next 18 months, adding about 2.9% to the nation's inventory. Should the current economic slowdown turn into a deep recession, the industry's prospects could dim. But when the causes of this downturn are reconstructed, at least real estate can claim an alibi.-- Dean Starkman * GSP is an L.A. correspondent for ARCS Commercial Mortgage, the nation's largest FNMA/DUS originator. Note: Lender pricing and loan points are subject to change and exclude GSP loan placement fees.