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ULI Los Angeles DEBT Where to find it in 2010

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This is a presentation I prepared for a ULI LA Education Event "DEBT: Where to find it in 2010." We brought 4 institutional scale lenders together, to respond to 4 loan request scenarios. If the CMBS market grows 10x in 2010, then it will only accomodate 3% of maturities. Debt will still come from Life Cos, Banks (recourse & non-recourse), and Mezz lenders

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ULI Los Angeles DEBT Where to find it in 2010

  1. 1. DEBT WHERE TO FIND IT IN 2010? This event was made possible by the above sponsors
  2. 2. PANELISTS • Bill Harvey Senior Vice President • Jaime Zadra Principal • Ronnie Gul (in place of Steve Fried) Vice President • Rudy Kramer Senior Vice President
  3. 3. MARKET PRESSURE POINTS  Funding gap  $450 bn maturities in 2010/2011/2012  If CMBS issuance grows 10X from 2009 issuance ($130 mn), it's only 3% of 2010 maturities  maturity events & new debt to come from Banks, Life Companies, Agency, & Specialty  Ample buy-side liquidity in the market today  Abundant Institutional Capital for core assets in gateway markets  Plenty of private capital (pricing is key) for secondary and transitional properties  Declining fundamentals as continued job losses ripple through the office market  Scarcity of product on the market is driving price (ahead of fundamentals)  Quality assets get pricing premiums
  4. 4. THE UNDERWRITTEN NOI Underwriting  Vacancy – 10% to account for weakening fundamentals, credit quality of tenants  Rents – Decreases of 20%-40% depending upon the market  T.I.’s – Increases of 50%+ from current market (Manhattan = $70 psf)  Lease-up – Doubling lease-up time  Reserves – $.20/.25 psf  Residual – 50-100 bp over going in cap rate Result  NOI is 10-20% less than actual operating statements  Lender LTV: 50%-65%, Borrower LTV: 40%-55%  Buyer Cap Rate: 7%-10%, Seller Cap Rate: 9%-12%  Result = Value Dislocation (price is hard to discover)  Net Cash Flow v. Net Operating Income
  5. 5. HFF DEBT TRANSACTION ACTIVITY % of Loan Transaction Volume 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2007 2008 3Q 2009 SOURCE: HFF Transactional Activity by Dollar Volume
  6. 6. OVERALL HOLDERS OF SECURED CRE DEBT 9/09 9/08 ($Bil.) ($Bil.) % Chg. Banks & Thrifts $1,722.4 $1,711.4 +0.4 CMBS CMBS 708.5 745.5 -5.0 21% Insurers Insurers 310.1 318.0 -2.5 9% Federal Agencies 282.6 250.9 +12.6 Banks & Agency CMBS 162.2 148.6 +9.2 Thrifts 50% Other 250.6 276.5 -9.4 Total $3,436.4 $3,450.9 -0.4 Federal Agencies Agency 8% Other CMBS 7% 5% SOURCE: Federal Reserve Board, as of Sep. 2009
  7. 7. AVERAGE LTVs FOR HFF Office Retail Year LTV LTV 2004 74% 75%  Declining leverage 2005 72% 75%  Declining property cash flow 2006 77% 74% 2007 72% 73% 2008 68% 64% 2009 60% 58% Since Aug 1 66% 63%
  8. 8. AVAILABILITY OF DEBT PRODUCTS Loan Type Availability Permanent/Term Loans Bridge Financing New Construction Financing Financing for unstabilized or non-cash flowing assets ?
  9. 9. Stabilized Office (Financial District) multi-tenant class-A Property 566,000 net rentable SF; 28 story; largest tenants are Description several leading law firms with lease maturity in 2017 (DLA Piper Rudnick, Howrey Simon Arnold) Buyer/Borrower JV between a foreign fund and an experienced/capable local operator structured as a 90/10 split; long-term hold strategy to own a stabilized CBD at well below replacement cost in a much-improved downtown LA Hurdles Loan request is greater than $50 MM Purchase Price $125,000,000 Cash Flow T12 NOI $8.8 MM $8,944,000 NOI (87% occupancy) Loan Request Amount Up to $81,250,000 LTV 50-65% Rate Fixed preferred Amortization 30 Year Term 10 years Recourse Non or partial-recourse preferred
  10. 10. Stabilized Retail (Coastal Orange County) Grocery/Drug anchored neighborhood center Property Description 140,000 net rentable SF; built in 1977, renovated in 2005; located at a primary intersection; Albertson’s occupies 60,000 SF (rollover in 2015) T-12 sales $425 psf; Rite-Aid occupies 20,000 SF (rollover in 2011) T-12 sales n/a; remaining tenants a good mix of national/local tenants with an even rollover over the next 5 yrs, avg sales of $325 psf and rents of $2.56 psf NNN Owner/Borrower Publicly traded REIT with a $27 MM securitized interest-only loan that matures in April 2010 (originated in 2005 as a 5 Year loan) Hurdle Rollover of maturing CMBS loan Valuation Borrower values NOI at a 7.5% cap (value = $34,700,000) Cash Flow T-12 NOI $2.6 MM (92% occupancy) Loan Request Amount Up to $27,000,000 LTV 50-65% Rate Fixed preferred or floating Amortization 30 Year Term 5 years Recourse Non or partial-recourse preferred
  11. 11. Multi-housing - approaching stabilization (downtown LA/Southpark neighborhood) Property 157,000 net rentable SF; 20 story bldg, 160 units, Description class-A amenities (pool, fitness, theater/game room) on a 20,000 SF single land parcel; 240 space parking facility (1 space per bedroom). An apartment built to condo specs at $350 psf, for a cost of $61,250,000 Owner/Borrower 5 member syndicate with an established apartment operator as GP Hurdles After concessions, rent is averaging $2.65 psf Purchase Price $45,000,000 ($257/SF) Cash Flow T-12 NOI $2.5 MM (80% occupancy) Loan Request Amount Up to $27,000,000 LTV 50-65% Rate Fixed preferred Amortization Interest Only or 30 Year Term 5 or 7 years Recourse Non or partial-recourse preferred
  12. 12. Industrial - unstablized (Cornerstone Commerce Center – Downey, CA) Property Description 45 newly constructed industrial condomiums, totaling 176,000 SF, situated on 8.83 acres. One of the most desirable industrial projects in the sub-market; part of a larger 195,000 SF, 50-unit business park “Cornerstone Commerce Center” built at $140 psf; units are 14% improved with office space Owner/Borrower Rexford, an experienced/capable operator of industrial real estate Hurdles Non-cash flowing asset; holdback for commissions, interest reserve, & Operating Expenses request; partial reconveyance; 11.39% market availability rent (vacant + sub-lease Strategy (i) Sell individual units to owner/users; (ii) sell the entire project to one investor at a market cap rate (Yr 3 stabilized Cap Rate projected to be 10.4%, based on 30% below market rents); (iii) sell individual leased multi-tenant buildings to smaller 1031 exchange buyers at anticipated pricing close to owner/user values. Purchase Price $10,000,000 ($57/SF) Loan Request Amount Up to $7,500,000 LTV 55-75% Rate Fixed or floating Amortization Interest only / 25 or 30 Year Term 3 Years Recourse Partial-recourse
  13. 13. QUESTIONS Moderator John Crump (Holiday Fenoglio Fowler) YLG Education Committee Greg Mino (Fuscoe Engineering) Bob Eidson (Asset Plan USA) Volunteer Alan Kwan (Rexford Industrial)

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