SPECIAL EDITION-MBA 2003

The 2003 Mortgage Bankers Association Commercial Real Estate Finance (MBA CREF) Annual Convention was held February 2-5 in San Diego, California. This year's event had close to 4,000 attendees, including 15 from George Smith Partners. This special edition of FinFax features: (1) "Extra Hot" Money updates, (2) notes from speaker presentations, (3) CMBS update based on a survey of the major originators and (4) Speaker's Corner. Overall impressions: (1) The major theme was "Too much money chasing too few good deals"; (2) "Real estate dynamics remain relatively strong during a weak economy that can't seem to get jump started"; (3) "Lenders are competing at all levels, everybody wants 'last look' from the brokers who control good transactions"; (4) Cap rates- "How low can they go?" (5) Traditional "high-octane" lenders such as mezz funds and "hard money" are lowering rates to compete, narrowing the premium between alternative sources and conventional financing programs; (6) Fixed and floating loan rates are at 40 year lows, and at historic lows for the majority of attendees; (7) In spite of the heavy competition and softening market conditions, new floating rate lenders and high leverage bridge lenders are entering the market because of poor alternative investment opportunities after a period of consolidation.

Nationwide Aggressive Bridge Lender Will Fund to 90% of Capital Structure: Lender offers both high leverage senior financing and mezzanine debt, and will consider hotels and health care in addition to the 4 basic product types. Yield driven financing objective means they will look at unusual deals that underwrite to below break-even cash flow for major repositions. They will fund interest reserve, TI's, etc. Program Highlights- Senior Bridge: (1) Loan Size: $5,000,000-$30,000,000; (2) Loan Term: 1-3 years typical, up to 5 years; (3) Pricing: Prime based, lender is looking for approximately 9.00% return based on fees and rate, but they will price down to compete on certain transactions; (4) Non-recourse; (5) Revolving credit lines available, also corporate financing. Mezzanine: (1) Loan Size: $1,000,000-$15,000,000; (2) Loan Terms: Up to 21/2 years typically; (3) Pricing: IRR Target 14-18% typically achieved by- 2% loan fee, 2% exit fee, and current pay during term; (4) Leverage: Up to 95%. Note: depending on risk profile, debt may be "participating" for maximum leverage transactions (both senior and mezz).

Mezzanine Debt (10-11% IRR) for Stabilized Office, Industrial, or Apartment Properties: This fund is targeted to place mezzanine debt behind life company, agency (FNMA) or conduit financing. Typical transaction: Lender is targeting stabilized office, industrial, or apartment properties with fixed rate debt that carries prepayment restrictions. Program Highlights: (1) Loan Size: $1,000,000 minimum and will consider almost any size transaction; (2) Rate: Flexible pricing structure to achieve a 10-11% IRR; (3) LTV: Up to 85% loan to value; (4) Loan Terms: Typically up to 5 years (extension options available to increase the term to 10 years based on capital availability); (5) Amort: Interest Only; (6) Recourse, secured by partnership interest and a recorded UCC form; (7) Lender Fee: Included in the pricing structure.

Mezzanine Debt Behind Multi-Family DMBS, Up to 85% LTV!! Lender has funded behind super low floating rate DMBS Financing. (1) Transaction size, Mezz Portion: $3,000,000-$10,000,000; (2) Rate: 10%; (3) Amort: Usually interest only, lender sometimes requires amortization; (4) Lender Fee: 1.0-2.0%; (5) Exit Fee: None. For more information on DMBS Financing, click here, or contact David Pascale, x 117, dpascale@gspartners.com

Fixed Rate Update- CMBS Competition Heats Up: With CMBS bond and swap spreads remaining stable, and after a year in which CMBS outperformed most other investment vehicles, originators are looking to book strong volumes in 2003. We spoke to several at the conference and conducted a survey this last week. Bottom Line: Spreads have tightened: (1) multifamily in the 140-170 range (bps over the 10 year T) (2) Anchored retail, industrial and class "A" office are predominately priced at 160-200 (3) Lenders are considering hotels again, especially hotels with barriers to entry, full service, outperforming competition in sub- markets, etc. Underwriting: Look for a slight easing on rating agency imposed "stress constants", but not much, underwriting solid C&I transactions to a 1.10 DCR at a 9.40-9.60% constant to win the business. Note: Multifamily stress constants are in the 8.50% range, as CMBS tries to compete with the agencies.

"Classic Bridge" Financing for Acquisition and/or Reposition Transactions: A core group of veteran floating rate loan officers have formed a new division at a well known nationwide lender. They are providing bridge loans nationwide in the $5,000,000-$25,000,000 range. Lender will underwrite to below break-even coverage, and fund TI/LC and interest reserve. Four basic product types plus some hotel financing. Program Highlights: (1) Pricing: LIBOR + 2.50-3.75%; (2) Max LTV: 90%; (3) Lender Fee: 1.0%, negotiable exit fee; (4) Non-recourse.

Eli Broad Interviewed by CNN's Willow Bay: Eli Broad sat down with financial broadcast journalist Willow Bay at the MBA. "They pay me to see around corners." Highlights: (1) Mr. Broad and partner Donald Kaufman built a multinational powerhouse with $25,000 in seed money, starting in 1957, as America became a suburban nation. Mr. Broad then led SunAmerica, a traditional life company into the burgeoning business of annuities; (2) Economy: He recommended an economic stimulus package which would benefit lower and middle class families, a true "across the board" approach; (3) Education/The Broad Foundation: As a charitable donor, he and his foundation demand accountability and is committed to helping K-12 education, and pointed out that colleges and universities thrive due to competition for students. The lower grades suffer due to lack of competition. His foundation encourages innovation and improved student performance. The foundation also has a training program for school superintendents and board members, so they may become more business and administratively savvy than those teachers promoted through the ranks; (4) Downtown LA: Mr. Broad spoke extensively of his commitment to create a vital central core to LA, most particularly along Grand Avenue. (see February 3, 2003 FinFax for more on Grand Ave and Downtown).

Wells Fargo Chief Investment Officer, Jim Paulsen- Presentation on the U.S. Economy: Highlights: (1) Since the beginning of U.S. Stock Market record keeping in 1800, there has only been one period of 4 consecutive years of down markets. Therefore, with 2000, 2001 and 2002 all being down years, there should be a 99.5% chance of 2003 being an up year. (2) Long term forces to watch: cycle forces, sector forces, debt, excess capacity, China (manufacturing power, emerging consumer power); (3) Fed seems "impotent": Why? May be due to too much consumer debt; (4) Positive Indicator: Mr. Paulsen believes, "Risk is high when no one is talking about risk, but now everyone is aware of risk, so risk should be lower now"; (5) Interesting Chart: Mr. Paulsen noted the ratio of the 10 year T/ 3 month T ratio (yield curve steepness) is at the highest level since the 30's. "Banks love that, borrow low and lend high!" (This should bode well for bank profits and offer buffer for expected higher level of loan losses and defaults)

George Smith will be speaking at: (1) Pircher Nichols & Meeks on February 18th, (2) Cox Castle Nicholson on March 12th and (3) Greenberg Glusker on March 18th. For more information on George Smith's speaking availability, please contact Jim Neuman, Director of National Business Development, at ext.134 or jneuman@gspartners.com.