Attention Property Owners! 2003 Tax Act

$63,750,000 Fannie Mae DMBS Loan with Initial Rate of 2.035% for the Refinance of the Heights - 582 Unit Apartment Project Near Fox Hills/Westchester: This is the sixth loan we have arranged for the R.W. Selby Company in the past nine months totaling approximately $167,000,000. Five of the six loans have been funded under the FNMA DMBS program through ARCS Commercial Mortgage. The Property: Project was built in 1988 (582 units in eight three-story buildings on 11 acre site) and consists of 396 one-bedroom units and 186 two-bedroom units. Amenities include a clubhouse (with a business center and movie theater), two swimming pools, two spas, and a fitness center with sauna, controlled access entrance, controlled ground parking and eight laundry facilities. The unit amenities include: fireplace, cathedral ceilings, alarm systems, patios and balconies, and several units have loft designs with rooftop decks. The Value Added Background: Borrower purchased the property in July of 2000. The building was under managed with rents that were substantially below market. This was as an opportunity to purchase a valuable asset that was in need of an aggressive "value added" repositioning program. Since the purchase, they have performed renovations totaling approximately $2.3 million ($3,951 per unit), which include renovations of the amenities, common areas, along with unit interiors and exterior, i.e. granite counter tops, new floor coverings, new appliances and landscaping along with a new gym. These renovations in conjunction with aggressive management plan have resulted in a 95% occupancy with an increase in net rental income of approximately 39% and more upside remaining to be harvested on continuing tenant turnover. FNMA DMBS Program Description: The DMBS (Discounted Mortgage Backed Security) loan is a 10 year adjustable rate trading mechanism with a 30 year amortization. It was formerly only available for cross-collateralized mortgage pools in excess of $100,000,000. It is selectively available for individual loans in excess of $50,000,000 million and on a case-by-case basis FNMA may allow waiver for loans less than $50,000,000 million, particularly when the client is financing multiple loans. The DMBS discount rate is re-priced every 90 days. The spread remains constant for the term of loan. The discount rate generally trades slightly inside of the 90 day LIBOR rate because of the AAA credit enhancement. Loan Terms: (1) Initial Interest Rate: 2.035% (2) Term/Amort: 10/30 (3) Adjustments: 90 days (4) Interest Rate Cap Escrow Cost: 67 bps to purchase the initial 5 year LIBOR cap base on a strike rate of 6.80% (rate cap of 7.7%), equivalent to 13.4 bps per year in rate (5) LTV: 75.0% (6) Loan Multiplier: 11.45 X net cash flow (7) Loan Per Unit: $109,536 (8) Prepayment: Fee Maintenance (9) Non-recourse. (George Smith, Joel Simaie)

$3,350,000 Refinance for 16,849 s.f., 100% Occupied, 2-story, Strip-Center in Beverly Center District of Los Angeles: This 12 tenant retail property was built in 1986 and was purchased by our borrower in 1988. Tenants include a dry cleaner, 2 restaurants, an independent gym, a pharmacy, and a few "mom and pops". Owner has displayed strong tenant retention ability. Challenges/Solutions: (1) 2nd story retail, the submarket supports this kind of density; (2) Dry cleaner: Since the dry cleaner uses an older, open-loop cleaning system, the lender agreed to allow an epoxy coating on the floor below the equipment and a secondary containment system instead of environmental insurance. Borrower was able to perform this work at a fraction of the cost of an environmental insurance policy. Although there was both a Phase I and Phase II environmental performed which indicated no contamination to the soil, the lender required these measures for the purposes of securitization. Customizations: (1) Instead of 'joint and several liability' for the recourse carveouts, the deal was structured with 'pro-rata share' liability between one managing member and 2 limited partners. The deal was set up this way since one of the managing members has a 1% ownership interest and was not interested in taking on recourse liability. We pro-rated the carveouts amongst the three owners with the largest ownership percentages. Terms: (1) Rate: 6.25%; (2) Term/Amort: 10/30; (3) LTV: 66%; (4) DCR: 1.50; (5) Non-recourse; (6) Par. (Michael Schwartz)

Attention Property Owners! 2003 Tax Act Contains Important Provisions Regarding Depreciation

We asked Stephen Fishman, CPA (GSP's accountant) to summarize some of the relevant 2003 Tax Law provisions for real estate owners.

Extension of Bonus First Year Depreciation: Real estate owners and other taxpayers generally must recover the cost of assets acquired through annual depreciation deductions over a prescribed number of years based upon the type of property acquired. The number of years and depreciation method are determined under IRS rules referred to as the modified accelerated cost recovery system (MACRS). In 2002 the tax law enacted "bonus" depreciation provisions that provided an additional first-year depreciation deduction equal to 30% of the cost of qualified property placed in service before January 1, 2005. The 2003 tax act increases the "bonus" depreciation to 50% of the cost of qualified property, with no cap on the amount of the first year bonus depreciation. Qualified property is defined the same as under the bonus depreciation provisions of current law, except that the applicable time period for acquisition (or self construction) of the property is modified. Qualified property consists of MACRS property that has a recovery life of less than 20 years (which primarily consists of personal property), computer software, and certain leasehold improvements. To qualify under the proposal, the property must be acquired after May 5, 2003, and before January 1, 2005, with no binding written contract for the acquisition in effect before May 6, 2003. For property that is manufactured, constructed, or produced by the taxpayer for use by the taxpayer, the taxpayer must begin the manufacture, construction, or production of the property after May 5, 2003. The bonus depreciation is available for both regular and alternative minimum tax purposes and is not mandatory. Example: Assume taxpayer A purchases $250,000 of carpets, drapes, and appliances for his 100 unit apartment building on June 1st of 2003. The depreciation expense for the year would be $142,862 consisting of the 50% bonus depreciation of $125,000 plus the regular depreciation on the balance! The proposal also increases the limitation on the amount of depreciation deductions allowed for certain passenger automobiles (Section 280F) in the first year to $7,650 (in lieu of the $4,600 provided under current law) for automobiles that qualify.

Increases Section 179 Expensing: Prior law allowed small business owners and entities to expense the cost of qualifying depreciable assets acquired in the year of acquisition under section 179 of the Internal Revenue Code. The section 179 expense limit has been raised to $100,000 from $25,000, effective for acquisitions after 1/1/03 and placed in service before 1/1/06. After 2005 the law reverts back to the rules in effect before the 2003 tax act. This provision is phased out dollar for dollar for acquisitions in excess of $400,000, which has been raised from $200,000 under prior law. Property qualifying for the election must generally be tangible personal property, like equipment, vehicles, and machinery. The bill also includes "off-the-shelf computer software" placed in service in a tax year beginning in 2003, 2004, and 2005, as qualifying property. In addition, both section 179 and the bonus depreciation rules can be used together. Please feel free to contact Stephen J. Fishman at 818-783-7140 or SFishman@FBCO.com

Interest Rate Update: 10-year treasury yield, currently 3.36%! George Smith: "Federal Reserve officials have signaled the central bank would be prepared to buy longer-maturity debt to halt a drop in the inflation rate. The concept that Greenspan is no longer worried about inflation and wants to 'halt drop in the inflation rate' is mind numbing. I remember double digit inflation and Volker pushing prime to 21% to break the back of inflation in 1981-82."