The Anderson School's Steve Cauley

Volume IX, No. 8 March 9, 2001   KEY RATE INDICES FANNIE MAE RATES * Prime Rate 8.50% 11th District 5.514% 3 Mo. T’s (YTM) 4.71% 6 Mo. T’s (YTM) 4.62% 5 Yr. U.S. T’s 4.71% 10 Yr. US T’s 4.93% 30 Yr. US T’s 5.32% 12-MAT 5.871% LIBOR - 1 mo. 5.19% LIBOR - 3 mo. 5.04% LIBOR - 6 mo. 4.97% LIBOR - 1 yr. 4.86% Tier 2+ (80% LTV) 6.98% Tier 3+ (65% LTV) 6.80% Tier 4+ (55% LTV) 6.60% 10 yr. term/30 yr. amort. TRANSACTION OF THE WEEK!!! $41,000,000, 7.35% for 2 "Telecom" Office Buildings in Downtown Los Angeles: Building #1: Approx. 350,000 s.f., built in the 1920's, substantial amount of upgrading done by previous owner, strategically located by major telecom hub, 100% occupied. Terms: (1) Pricing: T + 235; (2) Term/Amort: 10/30; (3) LTV: 55%; (4) DCR: 1.50; (5) Non-recourse; (6) Lender Fee: Par. Building #2: 150,000 s.f., strategically located near telecom hub, built in the 1950's, 90% occupied. Terms: (1) Pricing: T + 242; (2) Term/Amort: 10/30; (3) LTV: 80%; (4) DCR: 1.30; (5) Non-recourse; (6) Lender Fee: Par. Challenges to Financing: (1) Older buildings achieving extremely high rents, but risk mitigated by strong credit with some of the telecom tenants. (2) Rollover, which is mitigated by TI and leasing commission reserves; (3) A different and unique product type with rents that are above Class A office space, but not for telecom. Characteristics of telecom tenants are above market NNN rents, 15 year lease terms, strong regional, national or international credit, and tenants pay their own TI's - upwards of $200 per s.f. The tenants also spend larger additional expenditures on specialized equipment that cannot be moved. These factors contributed to lender getting their arms around the "telecom" tenants. (4) The strategic location which is non-duplicable and the borrower's superior experience with telecom tenants made the transaction attractive. The lender became very comfortable with the borrower's ability to manage the property and the sub-market dynamics. (Michael T. Gottlieb) $2,975,000 Permanent for 34,000 s.f. Single-Tenant (Non-Credit), R&D Facility in San Diego Area: GSP has arranged fixed-to-floating rate financing for this specialized medical supplier tenanted building. The building is 80% office, 20% warehouse. Our borrower purchased the property approximately 3 years ago, rehabbed the building and leased it to a tenant from one of his nearby properties. The tenant's space needs were growing. A regional portfolio lender provided a unique financing structure allowing the borrower to pay off his original acquisition loan and get cash out. Terms: (1) Rate: 2 years fixed @ 8.50%, 8 years floating @ 6-month LIBOR + 2.75% (floor-8.75%, ceiling-12.5%); (2) Term/Amort: 10/25; (3) DCR: 1.25; (4) LTV: 79%; (5) Prepayable at par after year 2; (6) Recourse; (7) Lender Fee: 1.0%. (Gary E. Mozer, Gerald Price) The Anderson School's Steve Cauley Delivers Sobering Outlook for Economy at Luncheon I of the 2001 GSP Executive Luncheon Series to Benefit the A-TMRF: Mr. Cauley is the Associate Director of UCLA's Anderson School Real Estate Department. Highlights of his presentation: (1) US Economy Overall: Soft landing most likely, going back to more normal rates of GDP. 2001: 1.1%, 2002-3: 2.2% (considered "sustainable") "Equities are overvalued, Real Estate is the investment of the next decade"; (2) Big Risks for the Economy Loom!: stock market overvaluation, oil supply disruption, dollar devaluation, California risk (energy); (3) Stock Market Overvaluation: The NASDAQ 100 P/E ratio was 165 at its March 2000 peak. Today, even after the dramatic fall, the P/E stands at 811. Why? Earnings have plummeted over 90%, dropping much faster than stock prices. Conclusion: NASDAQ may crash further, eroding the "wealth effect" and dampening the technology boom; (4) More on P/E Ratios: The average P/E ratio for the S&P 500 from 1950-1990 was 14. Today it stands at 24, even after the correction of 2000 and early 2001. Fact: a P/E ratio of 24 implies earnings will grow at 8.5% per year forever! Optimistic estimates of long term real growth are 2.5%. In order to sustain the growth implied by today's P/E ratios, profits would have to equal GDP at some point in the future! Conclusion: Mainstream stocks are seriously overvalued also. (5) Oil Supply: Middle east political turmoil may lead to serious supply disruption and price inflation; (6) Dollar Devaluation: Much of the 90's boom was funded by foreign investment. An exodus could lead to serious erosion in the value of U. S. currency; (7) California (Capital): California has been dependent on external financing: equity and venture capital, which is now slowing. Northern Cal has been more dependent than Southern Cal and should feel the pinch much harder; (8) California (Energy Problems): If rolling blackouts are occurring in winter, what will happen this summer when demand soars? Conservation can only help so much; supply must be dramatically increased. California did not increase generating capacity commensurate with economic growth and is now paying the price. New supply takes years to bring on-line. Opposition to new plants and high-tension lines in particular regions is difficult to overcome. Also, most new plants are powered by natural gas. The natural gas pipeline system is already running at near capacity. Several engineers indicate that nuclear power is one of the only feasible solutions. (9) Mr. Cauley stressed that the economy could probably handle any one of these issues without major disruption, but if two or more occur, the "landing" won't be soft. (David R. Pascale, Jr.) * 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.