ULI Los Angeles DEBT Where to find it in 2010

DEBTWHERE TO FIND IT IN 2010?This event was made possible by the above sponsorsPANELISTS• Bill HarveySenior Vice President• Jaime Zadra Principal• Ronnie Gul (in place of Steve Fried)Vice President• Rudy KramerSenior Vice PresidentMARKET 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 premiumsTHE UNDERWRITTEN NOIUnderwriting 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 – $.20/.25 psf Residual – 50-100 bp over going in cap rateResult NOI is 10-20% less than actual operating statements Lender LTV: 50%-65%, Borrower LTV: 40%-55% Buyer Cap Rate: 7%-10%, Seller Cap Rate: 9%-12% Result = Value Dislocation (price is hard to discover) Net Cash Flow v. Net Operating IncomeHFF DEBT TRANSACTION ACTIVITY% of Loan Transaction Volume50.0%40.0%30.0%20.0%10.0%0.0%200720083Q 2009SOURCE: HFF Transactional Activity by Dollar VolumeOVERALL HOLDERS OF SECURED CRE DEBT9/099/08($Bil.)($Bil.)% Chg.Banks & Thrifts$1,722.4$1,711.4+0.4CMBSCMBS708.5745.5-5.021%Insurers310.1318.0-2.5Insurers9%Federal Agencies282.6250.9+12.6Banks & Agency CMBS162.2148.6+9.2ThriftsOther250.6276.5-9.450%Total$3,436.4$3,450.9-0.4Federal Agencies8%Agency OtherCMBS7%5%SOURCE: Federal Reserve Board, as of Sep. 2009AVERAGE LTVs FOR HFFOffice RetailYearLTVLTV Declining leverage200474%75%200572%75%Declining property cash flow200677%74%200772%73%200868%64%200960%58%Since Aug 166%63%AVAILABILITY OF DEBT PRODUCTSLoan TypeAvailabilityPermanent/Term LoansBridge FinancingNew Construction FinancingFinancing for unstabilized or non-cash flowing assets?Stabilized Office (Financial District)multi-tenant class-AProperty 566,000 net rentable SF; 28 story; largest tenants are Descriptionseveral leading law firms with lease maturity in 2017 (DLA Piper Rudnick, Howrey Simon Arnold)Buyer/BorrowerJV 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 LAHurdlesLoan request is greater than $50 MMPurchase Price$125,000,000Cash FlowT12 NOI $8.8 MM$8,944,000 NOI (87% occupancy)Loan RequestAmountUp to $81,250,000LTV50-65%RateFixed preferredAmortization30 YearTerm10 yearsRecourseNon or partial-recourse preferredStabilized Retail (Coastal Orange County)Grocery/Drug anchored neighborhood centerProperty Description140,000 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/BorrowerPublicly traded REIT with a $27 MM securitized interest-only loan that matures in April 2010 (originated in 2005 as a 5 Year loan) HurdleRollover of maturing CMBS loanValuationBorrower values NOI at a 7.5% cap (value = $34,700,000)Cash FlowT-12 NOI $2.6 MM (92% occupancy)Loan RequestAmountUp to $27,000,000LTV50-65%RateFixed preferred or floatingAmortization30 YearTerm5 yearsRecourseNon or partial-recourse preferred