Capital Stacks

What Worked, What Didn’t

2012 ULI Spring Meeting

Central ValleyDowntown Mall

The Bad 

Central Valley Downtown Mall

• Bridge Financing Request

• Acquisition/Value Add

• Originally built in 1971

• Redeveloped in 1993

• 1.185 Million Sq Ft

• 400,000 Sq Ft Retail

• 285,000 Sq Ft Office

• 500,000 Sq Ft Anchors (not

part of collateral)

Central Valley Downtown Mall Strengths: Borrower ability to purchase security off-market. Purchase well below replacement cost (~$50 psf or about 85%

discount from 2007 appraisal). Sponsorship with track record on tough value add deals, and

compelling business plan. Challenges: Low occupancy: ~55% on retail, ~35% on office. Declining mall: “dark” space, difficult to keep national tenants,

endangered by lease clauses. Difficult market: 12% unemployment, high vacancy. Office leases with Government tenants. Capital required for TI/LC.

Central Valley Downtown Mall Why it didn’t happen: Going in occupancy too low. Unappealing market. Limited appetite for retail product. Complex and risky business plan. Significant redevelopment/construction want recourse. Too opportunistic. Turnaround plays on mall don’t fit equity expertise (if lender

has to foreclose).

“BAD” DEAL• $20 million refinance, full-

occupied retail center• 100,000 ft.² , food and drug

anchored center • Urban Infill location in major

Midwest market

CHALLENGES:

1. Aggressive Underwriting - maximum loan proceeds with complete cash out of all equity and existing debt.

2. Tenancy - Health club, big-box electronics retailers, non-reporting sales psf grocer.

3. Sponsorship – Pending legacy issues.

The Bad

One That Didn’t Work

• Denver, CO high-rise apartment development

• Large deal size - $80M

• 65% construction loan

• 35% equity

• Option to add mezz financing up to 85% of the capital stack

• Top of the market proforma rents

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60

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120

CapitalStack ‐W/O

Mezz

CapitalStack ‐W/Mezz

Equity

Mezz Debt ‐ 14%

Construction Loan ‐ Libor+ 225

Apartment Development

• Total capitalization - $80M

• 65% LTV construction loan due to size ($52M)

• Equity amount – $28M

• 3.25% debt interest rate w/o mezz (65% LTV)

• 5.77% blended interest rate w/mezz (85% LTV)

• Equity Multiple – 1.71 w/o mezz, 2.04 w/mezz

• Levered IRR – 17% w/o mezz, 22% w/mezz

• Yield on cost – 7.25% in either scenario

• Investor required return – 2.0 equity multiple, 20% IRR

Denver, CO High Rise Apartment Development

“GOOD” DEAL• $50 million new

construction• 200 units luxury, mid-

rise podium• Infill location in major

Western sunbelt market• Seasoned developer

CHALLENGES:

1. New construction - completion risk and high costs

2. Oversupply - Large supply of foreclosures

3. Funding - Very limited construction loan funds

“Good” Deal Capital Stack

CAPITAL STACK LEVERAGE (YIELD) UNDERWRITING

Construction Loan 60% (2.75%) Bank funded at 250 bps + Libor with 3‐5 yr mini‐perm.

Mezz Loan 15% (12%) 7% coupon rate with 12% IRR look back coterminous w/Construction.  No participation vs. Pref Equity.

JV Partner 12.25% (30%) 49/51% Pari Passu on net cash flow w/ 30% IRR, 40/60 thereafter.  Project control limited (capital decisions.)

Sponsorship 12.75% (30%+) Full control and guarantees and recapture of land profits before any reversionary profits.

CAPITAL STACK OPPORTUNITIES:

1. Shop the Stack – Lot’s of money, limited deals

2. Rates at the bottom – Moody’s Baa spreads widening. Alternative investments and “floors”

3. Wraparound – Capture low rates and worry later

The Good

• Single Tenant Triple Net Retail Portfolio

• Acquired in a DST structure

• 50% LTC CMBS permanent debt

• 50% bridge equity

• Approximately 2/3 investment grade, 1/3 sub-investment grade

One That Worked

Retail Portfolio

Capital Stack

Bridge EquityCMBS ‐ 5% Fixed

• Blended acquisition cap rate – 6.72%

• Closing costs – 3%

• Fees/syndication expenses – 10%

• Bridge equity funded at closing – 2.5%

• Interest rate on debt – 5%

• Levered return to investors – 6%

Retail Portfolio ‒ DST Structure

CBD OfficeSan Francisco

The Good—1 

CBD Office San Francisco

• Acquisition

• Value-Add Deal

• Built in 1912

• 129,000 Sq Ft

• 14 Floors + Penthouse

• 9,000 Sq Ft Floor Plates

• Updated Common Areas

CBD Office San Francisco Strengths: Rebounding market ‐ growing demand for this product type. Prospective leasing providing “upside” potential. Strong North Financial District location. Experienced and capable sponsorship. Good basis.

Challenges: Low occupancy at 74%. Near term lease rollover ~50% in 2012-2013. Capital required for tenant improvements, leasing commissions, and building improvements.

CBD Office San Francisco Financing Summary: Structure: Initial funding with a capital improvement and TI/LC

“holdback” reserve. Term: 4 years Amortization: 1 year interest only, then 30-yr schedule Recourse: non-recourse Rate: Mid-4% fixed rate Lender: Life Insurance Company Prepayment: 2.5% 1% 0.5% open last 6 mos. @ par. LTV: 55%

Waterfront Office San Francisco

The Good—2 

Waterfront Office San Francisco

• Refinance of Construction Loan

• Redevelopment of Historic Piers

• Completed in 2006

• 83,000 Sq Ft

• 64,000 Sq Ft Office

• 19,000 Sq Ft Restaurant

• 40,000 Sq Ft Portwalk

Waterfront Office San Francisco Strengths: 100% occupancy; mix of quality tenants. Irreplaceable asset in sought after waterfront location. Experienced and capable sponsorship in partnership with a

teacher retirement fund. Low leverage (<50%) financing request.

Challenges: Office rents at upper end of SF Market ($55-$75 psf) Ground leasehold and historic tax credits. Major tenant rollover within loan term. Restaurant income. High $ psf loan request.

Waterfront Office San Francisco Financing Summary: Use of Funds: Refinance construction loan Term: 7 years Amortization: 30-yr schedule Recourse: Non-recourse Rate: Mid-4% fixed rate Lender: Life Insurance Company Prepayment: T+100 2% year 5 1% year 6 Open year

7 LTV: 50%

Thank You