Continued Moderate Upward Pressure on Rates

Continued Moderate Upward Pressure on Rates, Jobless Recovery, Low Inflation and Treasury Bubble Bursts as Residential Lenders Cover Their Positions in Rising Market: Brian Lancaster, Managing Director of Structured Products Research for Wachovia Securities, provided an exceptional private briefing at the final event for the GSP 2003 Executive Luncheon Series. Lancaster was awarded "Analyst of the Year" at the First Annual CMBS Awards. Highlights: (1) GDP: "Slow" recovery with GDP projected to climb to 2.3% annual level by year-end 2003. (2) Fed: Likely to keep short-term rates low in 2003. (3) Treasuries: Rates to slowly rise. Why? Greenspan led the market to believe that the Fed was prepared to take the extraordinary step of purchasing long bonds (10 year T) in order to hold rates down and stave off deflation. (4) Residential Finance Market and Treasuries: The rise in rates is exacerbated by the $3 trillion residential MBS market. As rates start to rise, MBS bond holders suffer from "extension risk" as prepayments slow down. Thus, the bond terms "lengthen" and portfolio values suffer. Portfolio managers then hedge risk by shorting 5 and 10 year Treasuries. The MBS market's recent growth makes it a significant influence on long term rates. (5) Employment: Job growth has not occurred during this recovery, future job growth- "modest". (6) Real Estate Assets: Vacancy has risen (average vacancy is over 10%, after bottoming at 6% during 2000). However, loan performance remains strong. CMBS delinquencies are increasing steadily but remain under 2%. Property revenue has declined over the last 3 years, especially office sector. (7) More on Real Estate: Capital outflows from stock markets and corporate bond markets (plus 1031 activity) have supported values even as fundamentals (vacancy and income) decline. (8) Cap Rates: National apartment and retail average cap rates are in the sub 8.0% range while office and industrial are approximately 1.0% higher. (9) Property Sector Predictions: Office and industrial- will suffer from further revenue decline this year. Apartment- recovery this year, although some further revenue declines are expected (So Cal readers may not know that national apartment market dynamics have been soft lately). Retail- overall stability, watch for declines in consumer spending. Hotel- poised for recovery.

Treasury/Capital Markets Update: The new "on the run" 10 year T with a maturity of August 2013 was well received in the auction on Thursday, the yield is hovering in the 4.25% range. Roller Coaster Swaps: The 10 year Swap rose dramatically from 30 (mid-June) to 67 (last week) and back down to 42 (today). The sudden rise saw some CMBS originators tying loan spreads to Swaps in their applications, and adjusting their pricing matrices. (David Pascale)

$11,000,00 for 117,000 s.f. Office/Retail Complex in Inland Empire: This late 70's vintage property sits on 6 acres and consists of a 75,000 s.f., 5-story office building, a 2-story 16,300 s.f. office building and 2 1-story retail/service buildings. The complex features a pedestrian courtyard with amenities including restaurants, retail shops and banks. Occupancy is 93%, with 36 total tenants. A government tenant occupies approximately 40% of the large office building. GSP arranged 5 year fixed rate financing as borrower wanted to retain some flexibility in the near future. Lender and GSP underwrote using different vacancies, assumptions, re-imbursement schedules (modified gross and NNN) for the retail and office portions. Terms: (1) Rate: 5 year T + 2.75%; (2) LTV: 78%; (3) DCR: 1.35; (4) Non-recourse; (5) Lender Fee: Par. (Steve Bram, David Pascale)

$2,225,000 5 year Fixed Rate Perm for 86 Unit "Bricker" Near Downtown Los Angeles: This 1920's vintage, converted hotel consists of 58 studio apartments, the remainder are mostly 1 bedroom. GSP arranged fixed rate financing with substantial cash out with a portfolio lender. No PML or Property Condition reports were required. Processing and closing also featured: No outside legal, no cap-ex reserves, streamlined documents. Terms: (1) Rate: 5.40% fixed for 5 years, then floats at 12-MAT + 2.90% with a 5.40% floor and a 9.55% ceiling; (2) Term/Amort: 30/30; (3) LTV: 70%; (4) DCR: 1.55; (5) Prepayment: 1.25% for years 1-3, then open to prepay; (6) Non-recourse; (7) Lender Fee: 0.5%. (Gary E. Mozer, Lee Norman, Mark Wintner)

$1,120,000 Construction Loan for a 5,200 s.f. Strip Center in Harbor City, CA: GSP has arranged construction financing for a 4 tenant unanchored strip center in this South LA community. The property is 77% pre-leased (3 of the 4 tenant spaces) at app $2.70/month NNN. Challenge to financing: Borrower sought a lender who would not require environmental insurance as the site was a former Shell gas station with environmental contamination. Shell provided environmental indemnification and is paying for remediation (which is scheduled to take 18 months). GSP was able to identify a lender who did not require the insurance. Terms: (1) Rate: Prime + 1.00% (5.75% floor); (2) Term/Amort: 18 months/interest only; (3) Loan to Cost: 75%; (4) Recourse; (5) Lender Fee: 1.0%. (Michael Schwartz)

International Bank Targets California Market, Rolls Out Aggressive Program Through Subsidiary: GSP has already closed 2 transactions with this institution. Borrowers have appreciated the streamlined process and docs. Program offers fixed rates and flexibility. Program Highlights: (1) Loan Size: $3,000,000-$30,000,000 (lender can go to $50,000,000 in certain cases); (2) Typical Pricing: 10 year T + 2.10% range; (3) Term/Amort: 10/25; (4) Prepayment: 5,4,3,2,1,0; (5) Lender Fee: 1.0%; (6) Non-recourse or recourse, depending upon transaction; (7) Basic 4 product types considered (no hotel); (8) Geographic: California, Arizona and Nevada.