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| Volume IX, No. 5 |
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February 9, 2001 |
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| KEY RATE INDICES |
FANNIE MAE RATES * |
| Prime Rate |
8.50% |
| 11th District |
5.61% |
| 3 Mo. T’s (YTM) |
5.05%
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| 6 Mo. T’s (YTM) |
4.91% |
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| 5 Yr. U.S. T’s |
4.82% |
| 10 Yr. US T’s |
5.03% |
| 30 Yr. US T’s |
5.39% |
| 12-MAT |
6.108% |
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| LIBOR - 1 mo. |
5.57% |
| LIBOR - 3 mo. |
5.41% |
| LIBOR - 6 mo. |
5.27% |
| LIBOR - 1 yr. |
5.20% |
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| Tier 2+ (80% LTV) |
6.98% |
| Tier 3+ (65% LTV) |
6.83% |
| Tier 4+ (55% LTV) |
6.63% |
| 10 yr. term/30 yr. amort. |
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TRANSACTION OF THE WEEK!!!
$10,600,000 for 115,000 s.f. Rite-Aid, Goodwill, BofA, Church Anchored Retail Center in L.A. County: This neighborhood center was built in the mid 1960's and rehabbed in 1989. It is well located in a residential area on a corner with a 65,000 car per day traffic count and no other major retail nearby. The center consists of 8 buildings, including a 2-story building, on a 13-acre site containing over 40 tenants. Occupancy: 93%. Over 60% of the tenants are local businesses occupying 2,000 s.f. or less. Our borrower purchased the property in 1998 and has improved cash flow with hands-on management, aggressive leasing, etc. Challenges to Financing: (1) Rite-Aid credit has declined; (2) "Moving target" cash flow as spaces were being leased, extensions being signed during loan processing; (3) Virtually all in-line space leases roll during the next 4 years or are month to month. Lender became comfortable with borrower's ability to manage the property and submarket dynamics. Terms: (1) Pricing: T + 2.45%; (2) Term/Amort: 10/30; (3) LTV: 75%; (4) DCR: 1.30; (5) Non-recourse; (6) Lender Fee: Par; (7) Small holdback until Rite-Aid credit improves. (Steve Bram, David R. Pascale, Jr.) |
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Notes from this week's Mortgage Banker's Association Commercial Real Estate Finance Conference: Overall: (1) "Cautious Optimism": Despite a slowing economy, real estate fundamentals remain strong. Loan delinquencies remain at negligible levels across the board (under 0.5%). Lenders indicated that cap rates and property valuations have not weakened. "Red Flags": Retail (especially big box such as office supply and electronics), movie theaters (overbuilt with too much old supply still to be cleared through the system), and some selected office sub-markets (due to dot.com meltdown). (2) Capital Supply: Plenty of money for the right transactions; (3) Regional Strength: Many seminar speakers and lenders that we spoke with stated that Southern California and South Florida are very strong. The U.S.'s population shift west and south continues with "sun belt" markets are benefiting; (4) "Real Estate as a capital class has regained favor" In early 2000 analysts were downplaying returns on real estate as compared to high tech. In 2000 prices rose for the four basic real estate product classes, REIT stocks were up 15-20%, and the NASDAQ declined almost 50% from its March, 2000 high point. CMBS performed better than all other credit sensitive bond classes; (5) Interest Rates are expected to remain low as the Fed has indicated further rate cuts are on the way. No one betting significant further declines. CMBS: (1) Consolidation and market-exits have reduced to the playing field to approximately 15 first tier players with 5-7 being the larger originators. The market remains highly competitive with originator profit margins razor thin. (2) Interesting Fact: 20% of all outstanding commercial and multifamily mortgages have been securitized; (3) 2000 Originations: $49 billion down from $58.5 in 1999. 2001 is expected to remain steady at approximately $50 billion. As CMBS bonds remain in high demand with attractive yields and little danger of oversupply-expect spreads to remain stable. (4) CMBS vs. Corporates: AAA CMBS has long been considered comparable to A corporate bonds. Single A corporates opened 2000 trading about 10 bps inside AAA CMBS. By year-end, they were trading 40 bps wider than CMBS. AAA CMBS is now considered comparable to a AA corporate. (5) Hedging and Swaps: During 1999 and 2000, Swaps were considered a "near perfect hedge." Lately Swap rates have plunged as the economy cools and supply/demand dynamics have increased demand on one side of the Swap. Major IB trader: "There is a slight disconnect between Swaps and CMBS. Everyone is still hedging with them…But this is teaching us that there is no absolutely perfect hedge". Consensus: The best "hedge" is to sell the bonds as soon as possible. Originators are teaming up (sometimes as many as 5 or 6 in a single pool) to contribute collateral and sell loans ASAP after funding. Life Companies: (1) Life companies are flush with new allocations. (2) Underwriting/loan terms remain conservative (typically 25 year amort, 70% LTV, institutional quality assets. (3) Many LifeCo's buy CMBS: AAA's through their bond departments, as they are considered highly liquid instruments. BBB's are bought by the real estate departments after underwriting the underlying collateral; (4) Many have begun offering short term/floating rate instruments. Why? Life company obligations are changing as their GIC's (Guaranteed Investment Contracts) become shorter term; (5) More loans are being processed to CMBS standards so they can be sold at a later date and taken "off book" and a handful of life companies are originating CMBS for immediate securitization. Commercial Banks: (1) Construction: Spec construction is increasingly out of favor (except for industrial in certain markets); (2) The Federal Reserve and FDIC are "reigning in" over-leveraged portfolios at certain banks; (3) Credit is tightening for business and corporate lending; (4) Some regions feel they are on the peak or over the curve as far regarding the development cycle; (5) CMBS is the exit underwriting for payoff of construction loans; (6) Some banks are allocating less funds for construction and more for well priced on-book mini-perm floaters. Other Lending Sources: (1) Credit companies with non-recourse floating rate programs continue to compete for good repositioning deals; (2) Equity/Mezz programs are proliferating as opportunity funds seek high yields. New funds seem to be starting up each week. Several life companies have gotten in the game by teaming up with fund managers and providing mezz to bridge the gap between borrower equity and seasoned lower leveraged first mortgages. (David R. Pascale, Jr.)
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| New Treasury Issue: The new 10-year Treasury is pricing with a maturity of Feb, 2011. The 10-year is issued only twice annually. Demand is strong for the new issue and it is trading at approximately 10 bps inside the "off the run" August 2010 maturity. Swaps immediately widened 10 bps to offset. What does this mean for borrowers? Not much, as most CMBS originators are adjusting their matrices accordingly, leaving all in mortgage rates unchanged. (David R. Pascale, Jr.) |
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HOT MONEY!
Aggressive Interest-Only Floating Rate Program for Stabilized Properties - Targeting borrowers who believe they have near term upside or want flexibility. Loan amount determined by underwriting an equivalent fixed rate loan (1.20-1.25 DCR, 75-80% LTV depending on product type) at spreads of 190-250 over the 10-year T, using a 30 year amort. The same spread is then applied over 30-day LIBOR with the following terms: (1) 3 year term (extension options available); (2) Interest only; (3) Open to prepayment after year 1 w/ no penalty; (4) Non-recourse; (5) Lender Fee: 1.0%; (5) Exit Fee: 1.0% (waived if permanent is arranged with same lender).
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| * 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. |
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