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US Bank Tower
Wisdom Capital, LLC
Mezzanine Financing Team:
Jianhao Zeng
M.S. in Real Estate Finance
Class of 2015
NYUSchack Institute of Real Estate
jz1624@nyu.edu
347-997-0664
Eugene Zingman (GE Capital)
M.S. in Real Estate Finance
NYUSchack Institute of Real Estate
eugene.zingman@ge.com
New York based Debt Fund providing flexible real estate financing solutions to client
Primary focus on Mezzanine and Pref. Equity financing on high quality assets in top U.S. markets.
Wisdom Capital, LLC
Wisdom Capital, LLC
Property
&
Market Information
Wisdom Capital, LLC
U.S. Bank Tower
Wisdom Capital, LLC
LA Population & Unemployment
%
2%
4%
6%
8%
10%
12%
14%
Jan2005
Apr2005
Jul2005
Oct2005
Jan2006
Apr2006
Jul2006
Oct2006
Jan2007
Apr2007
Jul2007
Oct2007
Jan2008
Apr2008
Jul2008
Oct2008
Jan2009
Apr2009
Jul2009
Oct2009
Jan2010
Apr2010
Jul2010
Oct2010
Jan2011
Apr2011
Jul2011
Oct2011
Jan2012
Apr2012
Jul2012
Oct2012
Jan2013
Apr2013
Jul2013
Oct2013
Jan2014
Apr2014
Jul2014
Oct2014
Unemployment Rate - Montly data
Before Seasonal adjustment
Los Angeles Metro U.S. Average New York Metro
 The second largest city the United States with population of 10 million
 Population grew by 3.7% between 2000 and 2010, slightly higher than U.S.
average
 Cost of living in metro LA is 19% higher than the national average
 28% of adult population holds a college degree vs. 32% nationally
 Unemployment rate peaked out at 13.1% in July 2011 and had gone down to
7.5% as of December 2014.
Wisdom Capital, LLC
Los Angeles Job Growth
 Healthcare, Retail Trade and Info Tech are the leading industries in the metro
area
 Education & Healthcare and Professional & Business Services sectors grew at
the fastest rate in the second half of 2014 and are projected to continue the
trend throughout 2015.
Wisdom Capital, LLC
Los Angeles Employment Data
Unemployment Rate
9.1% in 2013
7.9% in 2014
Education &
Health 17%
Government 13%
Leisure & Hosp
11%
Retail Trade &
Consumer 14%
Prof & Business
14%
Finance 5%
Information 5%
Wholesale 5%
Construc,
Trans &Util
7%
Manufacturing
9%
Employment Data Employment By Sectors
Wisdom Capital, LLC
LA Office Inventory - Submarket
SFV - West 7%
West LA 6%
Century City 5%
Mid-Wilshire 8%
LAX/El
Segundo
8%
Downtown 18%
Other 48%
 One of the largest and decentralized office markets in the United States
with ~200MM SF of space, known for its low-density
 Subdivided into 21 distinct submarkets, with Downtown Submarket
accounting for 18.2% of the total inventory
 Downtown Submarket inventory is 35.8MM SF with an average asking
rent of $34.54 (REIS) as of 4Q 2014.
Wisdom Capital, LLC
Downtown Submarket Overview
 Downtown LA has been a slow-growth / low-volatility submarket
 Historically a major hub for government tenants, TAMI, healthcare and financial
services industries started to relocate here.
 Submarket provides great access to transportation and talented employee base
 Class A inventory practically unchanged since 2000 at ~23MM SF and projected
to remain the same through 2016. ~400,000 SF of new space is coming to
market in 2017 (Wilshire Grand).
 Per REIS, net absorption is projected at average 200,000 SF in 2015 and 2016.
New inventory is expected to be easily absorbed in 2017, with vacancy rate
remaining in 12%-13% range.
Wisdom Capital, LLC
Demand and leasing activities
 Leasing activity picked significantly in 4Q 2014 at 573K SF, 49% increase in
3Q 2014
 Legal, financial services, engineering firms account for a large portion of
the leasing activity.
 Lewis Brisbois Bisgaard leased 215,030 SF in U.S. Bank Tower, the large
transaction of the quarter.
 According to the forecast, the office vacancy rate will stay double digit in
Downtown LA
Effective Rent
$27.33
Source: Reis, Inc.
Vacancy Rate
12.5%
Source: PPR.
Wisdom Capital, LLC
Sales Comparable
 Only few comparable transactions over $100MM in the past couples years.
 Competitive Set - Weighted Average PPSF at $295
 2014 Los Angeles average Office Cap Rate was 5.4%, 60bps lower than prior
year.
 Per REIS, cap rates are forecast to stay below 6.0% mark through 2018
Wisdom Capital, LLC
Lender
Property Valuation
Wisdom Capital, LLC
Assumptions
TI LC
MLA Name
Market
Asking Rent
Renewal
Probability
Months
Vacant
Term
Length (Yr)
Months
Free Rent
In-Place Rent
Growth
New Renew New Renew
Office $25.00 65% 9 5 5 3.0% $35.00 $20.00 6.0% 4.0%
Retail $32.00 65% 9 5 5 3.0% $35.00 $20.00 6.0% 4.0%
Storage $18.00 65% 9 5 5 3.0% $0.00 $0.00 6.0% 4.0%
Lewis Brisbois $22.00 50% 12 5 5 3.0% $35.00 $20.00 6.0% 4.0%
Market Leasing Assumptions
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
General Vacancy (PPR) 12.5% 12.2% 12.3% 12.3% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4%
Market Rent Growth (PPR) 5.1% 3.5% 2.5% 2.2% 2.2% 1.8% 3.0% 3.0% 3.0% 3.0%
Vacancy & Rent Growth (PPR)
Model Start Date 1/1/2015
Expense Growth 3.0%
Standard Reserve (PSF) 0.20
Residual Assumptions
Going-in Cap Rate 5.50%
Annual Increases 0.10%
Discount Rate 8.00%
Cost of Sales 2.00%
Valuation Assumptions Deferred CapEx (per Appraisal)
Yr 1 $320,004
Yr 2 $2,590,254
Yr 3 $2,179,722
Yr 4 $6,826,317
Yr 5 $3,079,194
Yr 6 $1,270,632
Wisdom Capital, LLC
Property Valuation (As-Is) – Cash Flows
Year 1 2 3 4 5 6
BOP 2011 2012 2013 IN PLACE 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/2020
EOP Actual Actual Annualized 1/1/2015 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Physical Occupancy 68.1% 68.0% 87.5% 87.8% 87.7% 87.7% 87.6%
Rental Revenue (Inc Rent Steps)16,804,152 16,893,100 30,344,844 34,044,435 33,950,139 33,630,646 37,039,700 38,334,316 39,477,185 39,214,191
Reimbursements 10,129,357 9,707,367 12,017,968 12,362,365 16,393,884 16,943,594 17,432,025 17,954,986 18,472,548
Parking Income 4,585,725 4,649,881 4,854,369 5,000,000 5,150,000 5,304,500 5,463,635 5,627,544 5,796,370 5,970,262
Other Income 163,288 481,929 1,119,386 250,000 257,500 265,225 273,182 281,377 289,819 298,513
Total Rental Revenues 31,682,522 31,732,277 36,318,599 51,312,403 51,720,004 55,594,255 59,720,111 61,675,263 63,518,360 63,955,514
Concessions - - - (1,253,903) (1,253,903) (8,126,395) (1,105,573) (732,519) (551,741) (1,644,418)
Credit Loss - - - (517,200) (517,200) (555,943) (597,201) (616,753) (635,184) (639,555)
Absorption Vacancy (10,877,008) (10,877,008) (2,982,171) - - - -
General Vacancy - - (1,221,660) (4,518,843) (4,715,121) (4,855,694) (4,862,560)
Effective Gross Income 31,682,522 31,732,277 36,318,599 38,664,293 39,071,893 42,708,087 53,498,494 55,610,870 57,475,742 56,808,981
Taxes 4,151,065 4,198,456 4,720,935 4,862,563 5,008,440 5,158,693 5,313,454 5,472,858 5,637,043 5,806,155
Management Fee 971,706 980,737 1,151,438 1,185,981 1,221,561 1,258,207 1,295,954 1,334,832 1,374,877 1,416,124
Contract 3,926,316 3,805,198 3,953,355 4,071,956 4,194,114 4,319,938 4,449,536 4,583,022 4,720,513 4,862,128
Utilities 1,956,560 2,012,523 2,931,879 3,019,835 3,110,430 3,203,743 3,299,856 3,398,851 3,500,817 3,605,841
Insurance 1,187,875 1,218,082 2,317,718 1,292,263 1,331,031 1,370,962 1,412,091 1,454,454 1,498,087 1,543,030
R&M 3,192,926 3,075,955 2,172,067 2,237,229 2,304,346 2,373,476 2,444,681 2,518,021 2,593,562 2,671,368
G & A 2,205,348 1,968,507 1,864,094 1,920,017 1,977,617 2,036,946 2,098,054 2,160,996 2,225,826 2,292,600
Parking Expense 908,228 929,796 - 986,421 1,016,013 1,046,494 1,077,888 1,110,225 1,143,532 1,177,838
Other 140,533 101,858 1,493,069 108,061 111,303 114,642 118,081 121,624 125,272 129,031
Total Expenses 18,640,557 18,291,112 20,604,555 19,684,326 20,274,856 20,883,101 21,509,594 22,154,882 22,819,529 23,504,115
Net Operating Income 18,979,967 18,797,038 21,824,986 31,988,899 33,455,988 34,656,214 33,304,866
Standard Reserves 286,508 295,103 303,956 313,075 322,467 332,141 342,105
Net Operating Income 18,693,459 18,501,935 21,521,030 31,675,824 33,133,521 34,324,072 32,962,761
Capital Expenditures 320,004 2,590,254 2,179,722 6,826,317 3,079,194 1,270,632
Tenant Improvements 2,678,949 20,651,019 2,579,176 1,694,385 1,170,014 7,349,297
Leasing Commissions 752,387 5,515,932 755,993 438,684 330,421 1,969,587
Net Property Cash Flow 14,750,595 (7,236,175) 26,160,934 24,174,135 29,744,443 22,373,245
DIRECT CAP VALUE
Cap Rate: 5.50% Cap Rate: 6.00%
Discount Rate: 8.00%
Value: $339,881,070 Value: $432,654,162
Value/Unit $237 Value/Unit $302
5 YEAR NPV
Wisdom Capital, LLC
UW Comparison
Mezz Loan
Terms
Sponsor 1
Equity 1 Dev.
Sponsor 2
BlackBoulder
Sponsor 3
N&F Properties
Sponsor 4
PB Capital
Lender
U/W
Acquisition Price $424.7MM $430.9MM $457.7MM $465.2MM $432.6MM
Going-In Cap Rate 5.3% 5.5% 6.0% 4.25% 5.5%
Residual Cap Rate 5.7% 6.0% 6.5% 3.65% 6.0%
Capital Reserves
(PSF)
$0.50 $0.20 $0.28 $0.20 $0.20
Cost of Sales 4.0% 2.5% 5.0% 0.5% 2.0%
MLA (Avg. NNN) Office: $27
Retail: $49
Storage: $21
Office: $40 Gross
Retail: $56 Gross
Storage: $20
Office: $27
Retail: $35
Storage: $20
Office: $21
Retail: $32
Storage: $12
Office: $25
Retail: $32
Storage: $18
Market Rent Growth 3% per Annum 3% per Annum 3%, 6%, 5%, 4%, 3% 3% per Annum
PPR: 5.1%, 3.5%,
2.5%, 2.2%, 2.2%
TI (New/Renew)
$30 / $15 $25 / $12.5 Office: $35/$17.5
Tech: $20/$10
Office$65/$49
Retail $35/$20
Office: $35 / $20
Retail: $35 / $20
LC (New/Renew) 3.5% / 2.0% $2.5/SF / $1.25/SF 3.9% 4.15% 6.0% / 4.0%
Stabilized Occ. 90.0% 90.0% 90.0% 91.0% 87.6%
Lease Term
Office: 5 years
Retail: 10 years
5 years 4 - 10 years 10 years 5 years
Renewal Prob. 70% 70% 60% - 70% 75% 65%
Downtime 6 months 4 months 5 months N/A 9 months
Rent Abatement
Office: 5 months
Retail: 12
months
2 months 3-7 months 1-12 months 5 months
Wisdom Capital, LLC
Lender Strategy
Wisdom Capital, LLC
Wisdom Capital’s Mezz Strategy
 Four Equity Sponsors submitted best and final bids for acquisition of U.S.
Bank Tower, an iconic Los Angeles office property.
 Sponsors have approached two lenders to arrange for Senior Debt and
Mezzanine Loan to finance the acquisition.
 Wisdom Capital provided Mezzanine Financing terms to each Sponsor,
taking Senior Lender terms under consideration.
 Subject Analysis goes through each Equity Sponsor’s proposal and value-
add strategy in detail.
 Mezzanine Loan will help winning bidder finance project repositioning
and is expected to pay-off in 3-5 years, likely taken out by cheaper long
term financing.
 Mezzanine Loan sizing was based on As-Is Value of the subject
 Lender analysis focused on stability of cash flows during the loan term
and successful exit at maturity.
Wisdom Capital, LLC
Mezzanine Loan Terms Comparison
Mezz Loan
Terms
Sponsor 1
Equity One Dev.
Sponsor 2
BlackBoulder
Sponsor 3
N&F Properties
Sponsor 4
PB Capital
Acquisition Price $424.7MM $430.9MM $457.7MM $465.2MM
Loan Amount $45.0MM $70.0MM $70.0MM $45.0MM
Borrower Equity $125.6MM $91.7MM $137.0MM $167.3MM
LTC (Initial) 71.5% 80.2% 71.3% 65.3%
LTV As-Is (MAI) Up to 70.0% Up to 80.0% Up to 80.0% Up to 70.0%
Going-In DY
(Lender)
5.9% 5.0% 5.5% 5.9%
Year 3 DY 15.0% 11.0% 11.2% 12.4%
Interest Rate 7.0% Fixed 8.0% Fixed 1ML + 8.0% 1ML + 7.5%
Term 3Yr + two 1yr Ext. 3Yr + two 1yr Ext. 3Yr + two 1yr Ext. 3Yr + two 1yr Ext.
Amortization 3yr IO / 30Yr Am 3yr IO / 30Yr Am 3yr IO / 30Yr Am 3yr IO / 30Yr Am
Fees 1% Upfront 1% Upfront 1% Upfront 1% Upfront
Year 1 DSCR 1.12x 0.83x 0.90x 1.05x
Interest Reserve N/A
$2MM
(Replenishment)
$2MM
(Replenishment)
N/A
Prepayment
Month 1-36: YM
Month 37-56: 1%
Month 1-36: YM
Month 37-56: 1%
Month 1-24: MW
Month 25-36: 1%
Month 1-24: MW
Month 25-36: 1%
Recourse No / “Bad-Boy” No / “Bad-Boy” No / “Bad-Boy” No / “Bad-Boy”
Lockbox Soft Soft Soft Soft
Wisdom Capital, LLC
Equity Team 1
Equity One Development Partners
Wisdom Capital, LLC
Sponsor Strategy
 Equity One Development Partners plans to acquire U.S. Bank Tower, an
iconic LA office for $424.7MM
 Sponsor strategy is to reposition the property in 2015-2017 and
assumes 7yr hold period.
 Sponsor proposal calls for detailed repositioning plan to enhance the
property’s status as LA’s iconic building and maximize its value:
o New Observation Deck with Gift Shop
o Upgrade retail spaces up to the 6th Floor from current three floors
o Add state-of-the-art multimedia experience in the lobby and other floors
o Installation of state-of-the-art destination dispatch
o Upgrade landscaping
o Upgrade building energy rating from LEED Gold to LEED Platinum
Equity One Development
Wisdom Capital, LLC
Sponsor Strategy (cont.)
 Strategy calls for diversification of income base at the property, while
monetizing on the upper floor views and Downtown LA’s growing
retail and dining scene.
 Downsizing trend continues among traditional tenants in Legal and
Financial Services. Sponsor plans to convert two floors into smaller
spaces to focus on tech and creative tenants.
 Plan calls for attractive TI allowances and rent abatements for both
retail and office tenants in order to maximize face rent
 Sponsor is budgeting ~$66MM in capital and leasing costs for 2015-
2017 fiscal years.
Equity One Development
Wisdom Capital, LLC
Sources & Uses
Equity One Development
Sources Amount PSF Uses Amount PSF
Senior Loan $270,000,000 $188 Purchase Price $424,738,783 $296
Mezz Loan $45,000,000 $31 Closing Costs $12,726,367 $9
Borrower Equity $125,615,150 $88 Loan Fees $3,150,000 $2
Initial Sources $440,615,150 $308 Initial Uses $440,615,150 $308
Additional Borrower Equity $66,530,146 $46 CapEx (3yrs) $38,334,395 $27
Tenant Improvements (3yrs) $22,709,327 $16
Leasing Commissions (3yrs) $5,486,424 $4
Total Sources $507,145,296 $354 Total Uses $507,145,296 $354
Wisdom Capital, LLC
Underwriting Assumptions Equity One Development
Sponsor 1
Equity 1 Dev.
Lender
U/W
Acquisition Price $424.7MM $432.6MM
Going-In Cap Rate 5.3% 5.5%
Residual Cap Rate 5.7% 6.0%
Capital Reserves (PSF) $0.50 $0.20
Cost of Sales 4.0% 2.0%
MLA (Avg. NNN) Office: $27
Retail: $49
Storage: $21
Office: $25
Retail: $32
Storage: $18
Market Rent Growth 3% per Annum
PPR: 5.1%, 3.5%, 2.5%, 2.2%,
2.2%
TI (New/Renew)
$30 / $15 Office: $35 / $20
Retail: $35 / $20
LC (New/Renew) 3.5% / 2.0% 6.0% / 4.0%
Stabilized Occ. 90.0% 87.6%
Lease Term
Office: 5 years
Retail: 10 years
5 years
Renewal Prob. 70% 65%
Downtime 6 months 9 months
Rent Abatement
Office: 5 months
Retail: 12 months
5 months
Wisdom Capital, LLC
Loan Sizing Equity One Development
SENIOR LOAN SIZING MEZZ LOAN SIZING
Loan Terms Loan Sizing - 4 Tests Loan Terms Loan Sizing - 4 Tests
Benchmark 0.00% Max LTV 60.0% Benchmark 0.00% Max LTV 80.0%
Spread 5.00% Min Debt Yield 6.0% Spread 7.00% Min Debt Yield 5.0%
All-In Rate 5.00% Min DSCR 1.20x All-In Rate 7.00% Min DSCR 1.00x
Loan Term 10 Years Loan Term 5 Years
Interest Only 1 Years Interest Only 3 Years
Amortization Term 30 Years Test 1 - Max LTV Amortization Term 30 Years Test 1 - Max LTV
Payments per Year 12 Value (5 year NPV) $450,933,830 Payments per Year 12 Value (5 year NPV) $450,933,830
Maturity Year Max LTV 60.0% Maturity Year Max LTV 80.0%
Max Loan Amount 270,560,298$ Max Loan Amount 90,747,064$
UW Loan Metrics Test 2 - Min Debt Yield UW Loan Metrics Test 2 - Min Debt Yield
Value (5 year NPV) $450,933,830 Year 0 NOI 18,693,459$ Value (5 year NPV) $450,933,830 Year 0 NOI 18,693,459$
Year 0 NOI 18,693,459$ Debt Yield 6.0% Year 0 NOI 18,693,459$ Debt Yield 5.0%
Loan Amount (rounded) $270,000,000 Max Loan Amount 311,557,648$ Loan Amount (rounded) $45,000,000 Max Loan Amount 103,869,177$
LTV 60% Test 3 - Min DSCR LTV 70% Test 3 - Min DSCR
Debt Yield (Year 1) 6.9% Year 0 NOI 18,693,459$ Debt Yield (Year 1) 5.9% Year 0 NOI (Remaining) 18,693,459$
DSCR (Year 1) 1.38x DSCR 1.20x DSCR (Year 1) 1.12x DSCR 1.00x
Max Annual Debt Service 15,577,882$ Max Annual Debt Service 5,193,459$
Monthly Payment 1,298,157$ Monthly Payment 432,788$
Max Loan Amount $311,557,648 Max Loan Amount $65,051,347
Loan Amount 270,560,298$ Loan Amount 65,051,347$
Loan Amount (rounded) 270,000,000$ Loan Amount (rounded) 45,000,000$
Wisdom Capital, LLC
Target Capital Stack
 Conservative Debt Strategy:
o 61.5% LTV Senior Loan
o 72.8% LTV Mezz Loan
 5.9% going-in Mezz DY based on
Lender U/W
 Mezz DY increases to 15.0% in Yr3 and
17.4% in Yr5, making the loan easy to
refinance at both initial and extended
maturity dates
 Yr1 IO DSCR of 1.1x increases to 2.2x
DSCR in Yr3 and 2.5x DSCR in Yr5
Mezz
$45.0MM
7.0% Fixed Rate,
5.9% DY,
1.12x DSC,
71.5% LTC (Initial)
Up to 70.0% MAI LTV
Senior Mortgage
$270.0MM
5.0% Fixed Rate,
6.9% DY,
1.38x DSC,
61.3% LTC (Initial)
Up to 60.0% MAI LTV
Borrower Equity
$125.6MM
Equity One Development
Wisdom Capital, LLC
Exit Analysis
Market Rent Sensitivity
 Wisdom Capital expects to be fully paid off at the end of Yr3 or Yr4 - Yr5 in
case borrower exercises extension options
 Per Sponsor’s projections, property Yr3 residual value is $823MM and
$876MM in Yr5. Accordingly, Mezz Loan exit metrics look very strong:
o Yr3: 15.0% DY at 37% LTV
o Yr5: 17.4% DY and 34% LTV
Observation Deck Profit Margin Sensitivity
Equity One Development
Y r3 E xit L T V
-30% -20% -10% 0% 10% 20% 30%
4.0% 30% 28% 26% 25% 24% 22% 21%
4.5% 33% 31% 29% 28% 26% 25% 24%
5.0% 37% 35% 33% 31% 29% 28% 27%
5.5% 41% 38% 36% 34% 32% 31% 29%
6.0% 44% 42% 39% 37% 35% 34% 32%
6.5% 48% 45% 43% 40% 38% 36% 35%
7.0% 52% 49% 46% 43% 41% 39% 37%
7.5% 55% 52% 49% 47% 44% 42% 40%
8.0% 59% 56% 52% 50% 47% 45% 43%
E xit DY
-30% -20% -10% 0% 10% 20% 30%
Y r3 DY 12.6% 13.4% 14.2% 15.0% 15.8% 16.6% 17.4%
Y r5 DY 14.5% 15.5% 16.5% 17.4% 18.4% 19.4% 20.4%
C hange in Market R ent
C hange in Market R ent
ResidualCapRate
Y r3 E xit L T V
70% 60% 50% 40% 30%
4.0% 25% 26% 27% 28% 29%
4.5% 28% 29% 30% 31% 32%
5.0% 31% 32% 33% 34% 36%
5.5% 34% 35% 37% 38% 39%
6.0% 37% 38% 40% 41% 43%
6.5% 40% 42% 43% 45% 46%
7.0% 43% 45% 47% 48% 50%
7.5% 47% 48% 50% 52% 54%
8.0% 50% 51% 53% 55% 57%
E xit DY
70% 60% 50% 40% 30%
Y r3 DY 15.0% 14.5% 14.0% 13.4% 12.9%
Y r5 DY 17.4% 16.9% 16.3% 15.7% 15.1%
P rofit Margin
P rofit Margin
ResidualCapRate
Wisdom Capital, LLC
Conclusion
 Sponsor underwriting is based on reasonable assumptions
 Market Leasing Assumptions are in line with the market and rents
currently achieved at the property
 3% market rent growth rates are in-line with PPR 5yr average
projected at 3.1%
 Underwritten stabilized occupancy at 90.0% vs. PPR at 87.6%
 Income from Observation Deck and Stabilized Occupancy are the
primary drivers of NOI growth. Running sensitivities on both resulted
in acceptable residual value to insure successful take-out:
o Market rent stressed by 30% resulted inYr3 Exit LTV of 59% at 8.0% Residual Cap
Rate and 12.6% DY.
o Observation Deck Profit Margin stressed by 40% (from 70% base case
assumption) resulted in Yr3 Exit LTV of 57.0% at 8.0% Residual Cap Rate and
12.9% DY.
Equity One Development

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US Bank Tower

  • 1. US Bank Tower Wisdom Capital, LLC Mezzanine Financing Team: Jianhao Zeng M.S. in Real Estate Finance Class of 2015 NYUSchack Institute of Real Estate jz1624@nyu.edu 347-997-0664 Eugene Zingman (GE Capital) M.S. in Real Estate Finance NYUSchack Institute of Real Estate eugene.zingman@ge.com
  • 2. New York based Debt Fund providing flexible real estate financing solutions to client Primary focus on Mezzanine and Pref. Equity financing on high quality assets in top U.S. markets. Wisdom Capital, LLC
  • 5. Wisdom Capital, LLC LA Population & Unemployment % 2% 4% 6% 8% 10% 12% 14% Jan2005 Apr2005 Jul2005 Oct2005 Jan2006 Apr2006 Jul2006 Oct2006 Jan2007 Apr2007 Jul2007 Oct2007 Jan2008 Apr2008 Jul2008 Oct2008 Jan2009 Apr2009 Jul2009 Oct2009 Jan2010 Apr2010 Jul2010 Oct2010 Jan2011 Apr2011 Jul2011 Oct2011 Jan2012 Apr2012 Jul2012 Oct2012 Jan2013 Apr2013 Jul2013 Oct2013 Jan2014 Apr2014 Jul2014 Oct2014 Unemployment Rate - Montly data Before Seasonal adjustment Los Angeles Metro U.S. Average New York Metro  The second largest city the United States with population of 10 million  Population grew by 3.7% between 2000 and 2010, slightly higher than U.S. average  Cost of living in metro LA is 19% higher than the national average  28% of adult population holds a college degree vs. 32% nationally  Unemployment rate peaked out at 13.1% in July 2011 and had gone down to 7.5% as of December 2014.
  • 6. Wisdom Capital, LLC Los Angeles Job Growth  Healthcare, Retail Trade and Info Tech are the leading industries in the metro area  Education & Healthcare and Professional & Business Services sectors grew at the fastest rate in the second half of 2014 and are projected to continue the trend throughout 2015.
  • 7. Wisdom Capital, LLC Los Angeles Employment Data Unemployment Rate 9.1% in 2013 7.9% in 2014 Education & Health 17% Government 13% Leisure & Hosp 11% Retail Trade & Consumer 14% Prof & Business 14% Finance 5% Information 5% Wholesale 5% Construc, Trans &Util 7% Manufacturing 9% Employment Data Employment By Sectors
  • 8. Wisdom Capital, LLC LA Office Inventory - Submarket SFV - West 7% West LA 6% Century City 5% Mid-Wilshire 8% LAX/El Segundo 8% Downtown 18% Other 48%  One of the largest and decentralized office markets in the United States with ~200MM SF of space, known for its low-density  Subdivided into 21 distinct submarkets, with Downtown Submarket accounting for 18.2% of the total inventory  Downtown Submarket inventory is 35.8MM SF with an average asking rent of $34.54 (REIS) as of 4Q 2014.
  • 9. Wisdom Capital, LLC Downtown Submarket Overview  Downtown LA has been a slow-growth / low-volatility submarket  Historically a major hub for government tenants, TAMI, healthcare and financial services industries started to relocate here.  Submarket provides great access to transportation and talented employee base  Class A inventory practically unchanged since 2000 at ~23MM SF and projected to remain the same through 2016. ~400,000 SF of new space is coming to market in 2017 (Wilshire Grand).  Per REIS, net absorption is projected at average 200,000 SF in 2015 and 2016. New inventory is expected to be easily absorbed in 2017, with vacancy rate remaining in 12%-13% range.
  • 10. Wisdom Capital, LLC Demand and leasing activities  Leasing activity picked significantly in 4Q 2014 at 573K SF, 49% increase in 3Q 2014  Legal, financial services, engineering firms account for a large portion of the leasing activity.  Lewis Brisbois Bisgaard leased 215,030 SF in U.S. Bank Tower, the large transaction of the quarter.  According to the forecast, the office vacancy rate will stay double digit in Downtown LA Effective Rent $27.33 Source: Reis, Inc. Vacancy Rate 12.5% Source: PPR.
  • 11. Wisdom Capital, LLC Sales Comparable  Only few comparable transactions over $100MM in the past couples years.  Competitive Set - Weighted Average PPSF at $295  2014 Los Angeles average Office Cap Rate was 5.4%, 60bps lower than prior year.  Per REIS, cap rates are forecast to stay below 6.0% mark through 2018
  • 13. Wisdom Capital, LLC Assumptions TI LC MLA Name Market Asking Rent Renewal Probability Months Vacant Term Length (Yr) Months Free Rent In-Place Rent Growth New Renew New Renew Office $25.00 65% 9 5 5 3.0% $35.00 $20.00 6.0% 4.0% Retail $32.00 65% 9 5 5 3.0% $35.00 $20.00 6.0% 4.0% Storage $18.00 65% 9 5 5 3.0% $0.00 $0.00 6.0% 4.0% Lewis Brisbois $22.00 50% 12 5 5 3.0% $35.00 $20.00 6.0% 4.0% Market Leasing Assumptions Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 General Vacancy (PPR) 12.5% 12.2% 12.3% 12.3% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% Market Rent Growth (PPR) 5.1% 3.5% 2.5% 2.2% 2.2% 1.8% 3.0% 3.0% 3.0% 3.0% Vacancy & Rent Growth (PPR) Model Start Date 1/1/2015 Expense Growth 3.0% Standard Reserve (PSF) 0.20 Residual Assumptions Going-in Cap Rate 5.50% Annual Increases 0.10% Discount Rate 8.00% Cost of Sales 2.00% Valuation Assumptions Deferred CapEx (per Appraisal) Yr 1 $320,004 Yr 2 $2,590,254 Yr 3 $2,179,722 Yr 4 $6,826,317 Yr 5 $3,079,194 Yr 6 $1,270,632
  • 14. Wisdom Capital, LLC Property Valuation (As-Is) – Cash Flows Year 1 2 3 4 5 6 BOP 2011 2012 2013 IN PLACE 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/2020 EOP Actual Actual Annualized 1/1/2015 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 Physical Occupancy 68.1% 68.0% 87.5% 87.8% 87.7% 87.7% 87.6% Rental Revenue (Inc Rent Steps)16,804,152 16,893,100 30,344,844 34,044,435 33,950,139 33,630,646 37,039,700 38,334,316 39,477,185 39,214,191 Reimbursements 10,129,357 9,707,367 12,017,968 12,362,365 16,393,884 16,943,594 17,432,025 17,954,986 18,472,548 Parking Income 4,585,725 4,649,881 4,854,369 5,000,000 5,150,000 5,304,500 5,463,635 5,627,544 5,796,370 5,970,262 Other Income 163,288 481,929 1,119,386 250,000 257,500 265,225 273,182 281,377 289,819 298,513 Total Rental Revenues 31,682,522 31,732,277 36,318,599 51,312,403 51,720,004 55,594,255 59,720,111 61,675,263 63,518,360 63,955,514 Concessions - - - (1,253,903) (1,253,903) (8,126,395) (1,105,573) (732,519) (551,741) (1,644,418) Credit Loss - - - (517,200) (517,200) (555,943) (597,201) (616,753) (635,184) (639,555) Absorption Vacancy (10,877,008) (10,877,008) (2,982,171) - - - - General Vacancy - - (1,221,660) (4,518,843) (4,715,121) (4,855,694) (4,862,560) Effective Gross Income 31,682,522 31,732,277 36,318,599 38,664,293 39,071,893 42,708,087 53,498,494 55,610,870 57,475,742 56,808,981 Taxes 4,151,065 4,198,456 4,720,935 4,862,563 5,008,440 5,158,693 5,313,454 5,472,858 5,637,043 5,806,155 Management Fee 971,706 980,737 1,151,438 1,185,981 1,221,561 1,258,207 1,295,954 1,334,832 1,374,877 1,416,124 Contract 3,926,316 3,805,198 3,953,355 4,071,956 4,194,114 4,319,938 4,449,536 4,583,022 4,720,513 4,862,128 Utilities 1,956,560 2,012,523 2,931,879 3,019,835 3,110,430 3,203,743 3,299,856 3,398,851 3,500,817 3,605,841 Insurance 1,187,875 1,218,082 2,317,718 1,292,263 1,331,031 1,370,962 1,412,091 1,454,454 1,498,087 1,543,030 R&M 3,192,926 3,075,955 2,172,067 2,237,229 2,304,346 2,373,476 2,444,681 2,518,021 2,593,562 2,671,368 G & A 2,205,348 1,968,507 1,864,094 1,920,017 1,977,617 2,036,946 2,098,054 2,160,996 2,225,826 2,292,600 Parking Expense 908,228 929,796 - 986,421 1,016,013 1,046,494 1,077,888 1,110,225 1,143,532 1,177,838 Other 140,533 101,858 1,493,069 108,061 111,303 114,642 118,081 121,624 125,272 129,031 Total Expenses 18,640,557 18,291,112 20,604,555 19,684,326 20,274,856 20,883,101 21,509,594 22,154,882 22,819,529 23,504,115 Net Operating Income 18,979,967 18,797,038 21,824,986 31,988,899 33,455,988 34,656,214 33,304,866 Standard Reserves 286,508 295,103 303,956 313,075 322,467 332,141 342,105 Net Operating Income 18,693,459 18,501,935 21,521,030 31,675,824 33,133,521 34,324,072 32,962,761 Capital Expenditures 320,004 2,590,254 2,179,722 6,826,317 3,079,194 1,270,632 Tenant Improvements 2,678,949 20,651,019 2,579,176 1,694,385 1,170,014 7,349,297 Leasing Commissions 752,387 5,515,932 755,993 438,684 330,421 1,969,587 Net Property Cash Flow 14,750,595 (7,236,175) 26,160,934 24,174,135 29,744,443 22,373,245 DIRECT CAP VALUE Cap Rate: 5.50% Cap Rate: 6.00% Discount Rate: 8.00% Value: $339,881,070 Value: $432,654,162 Value/Unit $237 Value/Unit $302 5 YEAR NPV
  • 15. Wisdom Capital, LLC UW Comparison Mezz Loan Terms Sponsor 1 Equity 1 Dev. Sponsor 2 BlackBoulder Sponsor 3 N&F Properties Sponsor 4 PB Capital Lender U/W Acquisition Price $424.7MM $430.9MM $457.7MM $465.2MM $432.6MM Going-In Cap Rate 5.3% 5.5% 6.0% 4.25% 5.5% Residual Cap Rate 5.7% 6.0% 6.5% 3.65% 6.0% Capital Reserves (PSF) $0.50 $0.20 $0.28 $0.20 $0.20 Cost of Sales 4.0% 2.5% 5.0% 0.5% 2.0% MLA (Avg. NNN) Office: $27 Retail: $49 Storage: $21 Office: $40 Gross Retail: $56 Gross Storage: $20 Office: $27 Retail: $35 Storage: $20 Office: $21 Retail: $32 Storage: $12 Office: $25 Retail: $32 Storage: $18 Market Rent Growth 3% per Annum 3% per Annum 3%, 6%, 5%, 4%, 3% 3% per Annum PPR: 5.1%, 3.5%, 2.5%, 2.2%, 2.2% TI (New/Renew) $30 / $15 $25 / $12.5 Office: $35/$17.5 Tech: $20/$10 Office$65/$49 Retail $35/$20 Office: $35 / $20 Retail: $35 / $20 LC (New/Renew) 3.5% / 2.0% $2.5/SF / $1.25/SF 3.9% 4.15% 6.0% / 4.0% Stabilized Occ. 90.0% 90.0% 90.0% 91.0% 87.6% Lease Term Office: 5 years Retail: 10 years 5 years 4 - 10 years 10 years 5 years Renewal Prob. 70% 70% 60% - 70% 75% 65% Downtime 6 months 4 months 5 months N/A 9 months Rent Abatement Office: 5 months Retail: 12 months 2 months 3-7 months 1-12 months 5 months
  • 17. Wisdom Capital, LLC Wisdom Capital’s Mezz Strategy  Four Equity Sponsors submitted best and final bids for acquisition of U.S. Bank Tower, an iconic Los Angeles office property.  Sponsors have approached two lenders to arrange for Senior Debt and Mezzanine Loan to finance the acquisition.  Wisdom Capital provided Mezzanine Financing terms to each Sponsor, taking Senior Lender terms under consideration.  Subject Analysis goes through each Equity Sponsor’s proposal and value- add strategy in detail.  Mezzanine Loan will help winning bidder finance project repositioning and is expected to pay-off in 3-5 years, likely taken out by cheaper long term financing.  Mezzanine Loan sizing was based on As-Is Value of the subject  Lender analysis focused on stability of cash flows during the loan term and successful exit at maturity.
  • 18. Wisdom Capital, LLC Mezzanine Loan Terms Comparison Mezz Loan Terms Sponsor 1 Equity One Dev. Sponsor 2 BlackBoulder Sponsor 3 N&F Properties Sponsor 4 PB Capital Acquisition Price $424.7MM $430.9MM $457.7MM $465.2MM Loan Amount $45.0MM $70.0MM $70.0MM $45.0MM Borrower Equity $125.6MM $91.7MM $137.0MM $167.3MM LTC (Initial) 71.5% 80.2% 71.3% 65.3% LTV As-Is (MAI) Up to 70.0% Up to 80.0% Up to 80.0% Up to 70.0% Going-In DY (Lender) 5.9% 5.0% 5.5% 5.9% Year 3 DY 15.0% 11.0% 11.2% 12.4% Interest Rate 7.0% Fixed 8.0% Fixed 1ML + 8.0% 1ML + 7.5% Term 3Yr + two 1yr Ext. 3Yr + two 1yr Ext. 3Yr + two 1yr Ext. 3Yr + two 1yr Ext. Amortization 3yr IO / 30Yr Am 3yr IO / 30Yr Am 3yr IO / 30Yr Am 3yr IO / 30Yr Am Fees 1% Upfront 1% Upfront 1% Upfront 1% Upfront Year 1 DSCR 1.12x 0.83x 0.90x 1.05x Interest Reserve N/A $2MM (Replenishment) $2MM (Replenishment) N/A Prepayment Month 1-36: YM Month 37-56: 1% Month 1-36: YM Month 37-56: 1% Month 1-24: MW Month 25-36: 1% Month 1-24: MW Month 25-36: 1% Recourse No / “Bad-Boy” No / “Bad-Boy” No / “Bad-Boy” No / “Bad-Boy” Lockbox Soft Soft Soft Soft
  • 19. Wisdom Capital, LLC Equity Team 1 Equity One Development Partners
  • 20. Wisdom Capital, LLC Sponsor Strategy  Equity One Development Partners plans to acquire U.S. Bank Tower, an iconic LA office for $424.7MM  Sponsor strategy is to reposition the property in 2015-2017 and assumes 7yr hold period.  Sponsor proposal calls for detailed repositioning plan to enhance the property’s status as LA’s iconic building and maximize its value: o New Observation Deck with Gift Shop o Upgrade retail spaces up to the 6th Floor from current three floors o Add state-of-the-art multimedia experience in the lobby and other floors o Installation of state-of-the-art destination dispatch o Upgrade landscaping o Upgrade building energy rating from LEED Gold to LEED Platinum Equity One Development
  • 21. Wisdom Capital, LLC Sponsor Strategy (cont.)  Strategy calls for diversification of income base at the property, while monetizing on the upper floor views and Downtown LA’s growing retail and dining scene.  Downsizing trend continues among traditional tenants in Legal and Financial Services. Sponsor plans to convert two floors into smaller spaces to focus on tech and creative tenants.  Plan calls for attractive TI allowances and rent abatements for both retail and office tenants in order to maximize face rent  Sponsor is budgeting ~$66MM in capital and leasing costs for 2015- 2017 fiscal years. Equity One Development
  • 22. Wisdom Capital, LLC Sources & Uses Equity One Development Sources Amount PSF Uses Amount PSF Senior Loan $270,000,000 $188 Purchase Price $424,738,783 $296 Mezz Loan $45,000,000 $31 Closing Costs $12,726,367 $9 Borrower Equity $125,615,150 $88 Loan Fees $3,150,000 $2 Initial Sources $440,615,150 $308 Initial Uses $440,615,150 $308 Additional Borrower Equity $66,530,146 $46 CapEx (3yrs) $38,334,395 $27 Tenant Improvements (3yrs) $22,709,327 $16 Leasing Commissions (3yrs) $5,486,424 $4 Total Sources $507,145,296 $354 Total Uses $507,145,296 $354
  • 23. Wisdom Capital, LLC Underwriting Assumptions Equity One Development Sponsor 1 Equity 1 Dev. Lender U/W Acquisition Price $424.7MM $432.6MM Going-In Cap Rate 5.3% 5.5% Residual Cap Rate 5.7% 6.0% Capital Reserves (PSF) $0.50 $0.20 Cost of Sales 4.0% 2.0% MLA (Avg. NNN) Office: $27 Retail: $49 Storage: $21 Office: $25 Retail: $32 Storage: $18 Market Rent Growth 3% per Annum PPR: 5.1%, 3.5%, 2.5%, 2.2%, 2.2% TI (New/Renew) $30 / $15 Office: $35 / $20 Retail: $35 / $20 LC (New/Renew) 3.5% / 2.0% 6.0% / 4.0% Stabilized Occ. 90.0% 87.6% Lease Term Office: 5 years Retail: 10 years 5 years Renewal Prob. 70% 65% Downtime 6 months 9 months Rent Abatement Office: 5 months Retail: 12 months 5 months
  • 24. Wisdom Capital, LLC Loan Sizing Equity One Development SENIOR LOAN SIZING MEZZ LOAN SIZING Loan Terms Loan Sizing - 4 Tests Loan Terms Loan Sizing - 4 Tests Benchmark 0.00% Max LTV 60.0% Benchmark 0.00% Max LTV 80.0% Spread 5.00% Min Debt Yield 6.0% Spread 7.00% Min Debt Yield 5.0% All-In Rate 5.00% Min DSCR 1.20x All-In Rate 7.00% Min DSCR 1.00x Loan Term 10 Years Loan Term 5 Years Interest Only 1 Years Interest Only 3 Years Amortization Term 30 Years Test 1 - Max LTV Amortization Term 30 Years Test 1 - Max LTV Payments per Year 12 Value (5 year NPV) $450,933,830 Payments per Year 12 Value (5 year NPV) $450,933,830 Maturity Year Max LTV 60.0% Maturity Year Max LTV 80.0% Max Loan Amount 270,560,298$ Max Loan Amount 90,747,064$ UW Loan Metrics Test 2 - Min Debt Yield UW Loan Metrics Test 2 - Min Debt Yield Value (5 year NPV) $450,933,830 Year 0 NOI 18,693,459$ Value (5 year NPV) $450,933,830 Year 0 NOI 18,693,459$ Year 0 NOI 18,693,459$ Debt Yield 6.0% Year 0 NOI 18,693,459$ Debt Yield 5.0% Loan Amount (rounded) $270,000,000 Max Loan Amount 311,557,648$ Loan Amount (rounded) $45,000,000 Max Loan Amount 103,869,177$ LTV 60% Test 3 - Min DSCR LTV 70% Test 3 - Min DSCR Debt Yield (Year 1) 6.9% Year 0 NOI 18,693,459$ Debt Yield (Year 1) 5.9% Year 0 NOI (Remaining) 18,693,459$ DSCR (Year 1) 1.38x DSCR 1.20x DSCR (Year 1) 1.12x DSCR 1.00x Max Annual Debt Service 15,577,882$ Max Annual Debt Service 5,193,459$ Monthly Payment 1,298,157$ Monthly Payment 432,788$ Max Loan Amount $311,557,648 Max Loan Amount $65,051,347 Loan Amount 270,560,298$ Loan Amount 65,051,347$ Loan Amount (rounded) 270,000,000$ Loan Amount (rounded) 45,000,000$
  • 25. Wisdom Capital, LLC Target Capital Stack  Conservative Debt Strategy: o 61.5% LTV Senior Loan o 72.8% LTV Mezz Loan  5.9% going-in Mezz DY based on Lender U/W  Mezz DY increases to 15.0% in Yr3 and 17.4% in Yr5, making the loan easy to refinance at both initial and extended maturity dates  Yr1 IO DSCR of 1.1x increases to 2.2x DSCR in Yr3 and 2.5x DSCR in Yr5 Mezz $45.0MM 7.0% Fixed Rate, 5.9% DY, 1.12x DSC, 71.5% LTC (Initial) Up to 70.0% MAI LTV Senior Mortgage $270.0MM 5.0% Fixed Rate, 6.9% DY, 1.38x DSC, 61.3% LTC (Initial) Up to 60.0% MAI LTV Borrower Equity $125.6MM Equity One Development
  • 26. Wisdom Capital, LLC Exit Analysis Market Rent Sensitivity  Wisdom Capital expects to be fully paid off at the end of Yr3 or Yr4 - Yr5 in case borrower exercises extension options  Per Sponsor’s projections, property Yr3 residual value is $823MM and $876MM in Yr5. Accordingly, Mezz Loan exit metrics look very strong: o Yr3: 15.0% DY at 37% LTV o Yr5: 17.4% DY and 34% LTV Observation Deck Profit Margin Sensitivity Equity One Development Y r3 E xit L T V -30% -20% -10% 0% 10% 20% 30% 4.0% 30% 28% 26% 25% 24% 22% 21% 4.5% 33% 31% 29% 28% 26% 25% 24% 5.0% 37% 35% 33% 31% 29% 28% 27% 5.5% 41% 38% 36% 34% 32% 31% 29% 6.0% 44% 42% 39% 37% 35% 34% 32% 6.5% 48% 45% 43% 40% 38% 36% 35% 7.0% 52% 49% 46% 43% 41% 39% 37% 7.5% 55% 52% 49% 47% 44% 42% 40% 8.0% 59% 56% 52% 50% 47% 45% 43% E xit DY -30% -20% -10% 0% 10% 20% 30% Y r3 DY 12.6% 13.4% 14.2% 15.0% 15.8% 16.6% 17.4% Y r5 DY 14.5% 15.5% 16.5% 17.4% 18.4% 19.4% 20.4% C hange in Market R ent C hange in Market R ent ResidualCapRate Y r3 E xit L T V 70% 60% 50% 40% 30% 4.0% 25% 26% 27% 28% 29% 4.5% 28% 29% 30% 31% 32% 5.0% 31% 32% 33% 34% 36% 5.5% 34% 35% 37% 38% 39% 6.0% 37% 38% 40% 41% 43% 6.5% 40% 42% 43% 45% 46% 7.0% 43% 45% 47% 48% 50% 7.5% 47% 48% 50% 52% 54% 8.0% 50% 51% 53% 55% 57% E xit DY 70% 60% 50% 40% 30% Y r3 DY 15.0% 14.5% 14.0% 13.4% 12.9% Y r5 DY 17.4% 16.9% 16.3% 15.7% 15.1% P rofit Margin P rofit Margin ResidualCapRate
  • 27. Wisdom Capital, LLC Conclusion  Sponsor underwriting is based on reasonable assumptions  Market Leasing Assumptions are in line with the market and rents currently achieved at the property  3% market rent growth rates are in-line with PPR 5yr average projected at 3.1%  Underwritten stabilized occupancy at 90.0% vs. PPR at 87.6%  Income from Observation Deck and Stabilized Occupancy are the primary drivers of NOI growth. Running sensitivities on both resulted in acceptable residual value to insure successful take-out: o Market rent stressed by 30% resulted inYr3 Exit LTV of 59% at 8.0% Residual Cap Rate and 12.6% DY. o Observation Deck Profit Margin stressed by 40% (from 70% base case assumption) resulted in Yr3 Exit LTV of 57.0% at 8.0% Residual Cap Rate and 12.9% DY. Equity One Development