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The Real Estate Capital Scoreboard - March, 2007


Chicago, Illinois, March 1, 2007 – Rates steadily dropped throughout the month, ending with a record one-day plunge just before the last day. Long term treasuries fell over a quarter percent settling in the mid-four-percent range. Yield curve remains relatively flat, dating back to mid-summer.

Since the market is flush with funds, a variety of creative debt and debt equity programs surface. Funding solutions include the following:

1. Forwards - Select life companies are offering combined construction and permanent loan programs based on forward-delivery pricing. These construction and permanent loans usually feature the same rate throughout the term. The construction component stretches as far as 24 months; the perm ranges from five to ten years. The pricing premium is between one and three basis points per month after the first quarter.
2. Preferred Equity - In those cases when junior debt and mezz financing are prohibited, lenders may offer additional funds by requesting a percent of ownership. Usually structured as a debt instrument.
3. Fixed Prepayments – For an additional rate premium of 10 to 25 basis points, lenders offer fixed prepayments, rather than defeasance or yield maintenance. Provides quantifiable exit pricing.

In addition to creative loan structuring, lenders entertain a wider variety of property types including marinas, golf courses, heavy industrials and restaurants.

Hot topics for the month are:

(1) Collateralized debt obligation issuance (CDO).
(2) Sizing of loans with replacement cost as a key variable.
(3) Debt and equity yield compression. Where can yield be found?


Aaron Gruen, an Advisory Board Member of The Real Estate Capital Institute notes “Given the compression in cap rates is unlikely to continue, income growth will matter more for investors to achieve desired returns. Selecting markets with favorable demand-supply conditions and assets with potential for increases in income is increasingly important.” He adds, “San Francisco and Silicon Valley are examples of markets where employment and space demand increases are translating into increased occupancies and rents.”


The Real Estate Capital Institute is a volunteer-based research organization that tracks income-property debt and equity yields. The Institute posts daily and historical benchmark rates including treasuries, bank prime and LIBOR. Hourly interest rate updates are also available by calling the Real Estate Capital RateLine at 7RE-CAPITAL (773-227-4825).


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