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For exclusive use Florida International University, 2015 REVISED SEPTEMBER 6, 2013 CRAIG FURFINE KEL757 The Return of the Loan: Commercial Mortgage Investing after the 2008 Financial Crisis \"Are you sure this isn't some kind of joke?\" Zoe Greenwood was glancing through the offering memorandum for a new commercial mortgage-backed securities (CMBS) deal on April 1, 2010, a time when the opportunities for commercial mortgage investors had been bleak to the point of comical. Scheduled to be issued in the next week or two, the RBSCF 2010-MB1 securities represented the first opportunity to buy CMBS backed by loans to multiple borrowers since credit markets had shut the securitization pipeline in June 2008. For Greenwood, a vice president at Foundation Investment Advisors (FIA), this new CMBS deal gave her a new investment opportunity to suggest to the firm's latest client, United Principal Life (UPL). Like many life insurance companies, UPL had remained a passive investor during the recent financial crisis, which meant it had endured significant losses on its commercial mortgage and commercial mortgage bond portfolios. Believing the worst to be over, UPL was looking to allocate more capital to real estate. Greenwood had planned to recommend an expansion in UPL's traditional commercial mortgage business, but these new bonds looked intriguing. She sat down and prepared to analyze whether the new CMBS could offer her client a superior risk-return tradeoff compared with making individual mortgage loans. Zoe Greenwood Greenwood had developed an interest in commercial real estate at a young age. Growing up surrounded by wide-open spaces along the English River in her hometown of Riverside, Iowa, she had a natural understanding of the potential in land. Her father, Karl, had harnessed some of that potential by successfully developing a series of retail strip malls in nearby Iowa City. After completing her bachelor's degree at the University of Iowa, Greenwood worked for a number of years as a financial analyst at Koenig Capital, a private real estate investment trust headquartered in St. Louis, where she was in charge of the financial modeling associated with the firm's portfolio of office buildings. Her years in St. Louis taught Greenwood two things. First, she really liked baseball; she was inspired as she watched the St. Louis Cardinals win the 2006 World Series after a mediocre 2013 by the Kellogg School of Management at Northwestern University. This case was developed with support from the June 2009 graduates of the Executive MBA Program (EMP-73). This case was prepared by Professor Craig Furfine with assistance from Mike Fishbein '12. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwisewithout the permission of Kellogg Case Publishing. This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 season, and she took the lesson that possibilities can be endless if you put your mind to something. Second, she discovered that she was more interested in the financing side of commercial real estate than the management side. To facilitate her career shift, Greenwood decided to go back to school and earn an MBA. She graduated in 2009 from the Kellogg School of Management with majors in real estate and finance. She was thrilled to accept an employment offer from FIA, an investment advisory firm based in Minneapolis. FIA's client base had originally focused on nonprofits such as foundations, endowments, municipalities, and charities, but the firm had begun advising mid-size insurance companies and even a few private high-net-worth clients. FIA believed in a holistic approach to its advisory work and designed investment recommendations tailored specifically to the needs of the individual client. However, because wealth preservation was important to most of its clients, FIA tended to recommend substantial portfolio allocations to fixed-income products. Beyond government bonds, FIA not only had the expertise to recommend investments in corporate and municipal bonds and residential and commercial mortgage-backed securities, but it also had relationships that would facilitate its clients making direct commercial real estate loans. United Principal Life United Principal Life was a mid-size life insurance company that primarily offered whole life policies to its customers, but had recently started adding term insurance, annuities, and other financial products to its mix. As of the end of the first quarter of 2010, its assets totaled $452 million, primarily allocated to a variety of fixed-income instruments as was typical in the life insurance industry (Exhibit 1). Greenwood had met UPL's managing director of investment strategy, Benjamin Pegg, at a recent conference sponsored by the National Association of Insurance Commissioners. The two quickly realized the potential for FIA to be of use to UPL. As a first step, Pegg agreed to hire FIA for the limited purpose of having Greenwood suggest how best to increase its holdings of real estate debt. In particular, UPL was looking at how to invest the proceeds from a recent maturing of $5.8 million of treasury bonds. UPL was not interested in owning real estate outrightit was too small to acquire institutional-quality commercial property and it had made the strategic decision to not become a limited partner in real estate private equity funds. Greenwood understood this to be a test both of her analytical capabilities and her real estate expertise. If sufficiently impressed with her analysis, UPL likely would turn to FIA for a more thorough review of its portfolio. For now, however, UPL simply wanted real estate exposure and had shared with FIA its investment policy (Exhibit 2). In follow-up conversations with Pegg, Greenwood understood that UPL's mortgage loan portfolio was currently invested in a portfolio of sixty-two mortgage loans. These loans had a typical size of between $2 and $3 million and were diversified geographically as well as across property types. Greenwood noted that UPL had experience investing in CMBS, with investmentgrade bonds in the portfolio spread across fourteen different securitizations brought to market between 2005 and 2007. To support these activities, UPL had a dedicated team of six real estate financial professionals who had the knowledge and experience to make both mortgage and mortgage bond investments. 2 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING The Market for Commercial Mortgage Credit Commercial mortgage credit was provided either by institutions that held those mortgages on their balance sheets or by those that would originate loans with the intention of using the loans as collateral for the issuance of CMBS. Life insurance companies liked lending against commercial property (e.g., office buildings, retail establishments, industrial properties, apartment buildings, and other specialized real estate such as hotels, medical buildings and hospitals, or storage facilities). Such properties generated the cash flow necessary to repay the mortgage loan by collecting rent from tenants. Not only were commercial mortgages implicitly backed by contracted cash flows, but such loans also had features that made them attractive to insurance companies looking to match the maturities of their assets to the maturities of their liabilities. Because commercial mortgage loans typically forbid loan prepayments, either through outright contractual bans, high prepayment penalties, or yield maintenance or defeasance requirements,1 insurance companies could be reasonably certain that loan maturities could be chosen to match the timing of their expected life insurance claims. Issuers of CMBS typically amass a pool of commercial mortgage loanseither by originating the loans themselves or by acquiring them from other loan originatorswhich then serves as collateral for the CMBS. The cash flows promised to the CMBS derive from the interest and principal repayments promised by the pool of underlying commercial mortgages. Realized cash flows on the CMBS, of course, depend on the performance of the underlying loans in the pool. With restrictions on prepayment on the underlying loans, CMBS deal structuring largely focuses on addressing the allocation of default risk. Default risk on the underlying pool is typically reallocated to CMBS through a sequential ordering of individual bonds. Within a typical deal structure, underwriters create three classes of securities, or tranches. The securities belonging to the largest class are the most senior, attract a AAA bond rating, and are typically marketed to financial institutions and money managers as an alternative to corporate bonds. At the other end of the credit spectrum is the below-investment grade tranche, commonly referred to as the Bpiece. These bonds are sold to high-yield investors who have the commercial real estate expertise to understand the risks inherent in the pool of underlying loans. In exchange for buying the riskiest tranche of the securitization structure, the B-piece investor typically controls the workout of loans that become troubled over the life of the pool.2 A failure of an underwriter to find a willing B-piece investor typically dooms the securitization, and therefore pools are assembled and tranched in a way that such investors are willing to take part. Between the institutional investors looking for fixed-income securities and the commercial real estate experts who sought high yields in exchange for careful underwriting and analysis is typically a set of mezzanine investors, who were a cross between the investors at either end of the capital structure (Exhibit 3). Greenwood had left Koenig Capital to attend Kellogg just as the first signs of trouble in real estate markets were appearing. At Koenig, she had first-hand experience watching the tremendous growth in commercial real estate lending in the years immediately preceding the financial crisis (Exhibit 4). Commercial mortgages held by banks rose by nearly $800 billion between mid-2004 and late 2008. Similarly, the amount of outstanding CMBS doubled from $400 1 Defeasance requires a borrower seeking to prepay a securitized loan to place treasury securities into the pool in an amount that would generate the originally promised principal and interest payments. 2 Technically, the pooling and servicing agreement of the securitization would typically grant the \"controlling class,\" or the security holder in the first-loss position, the right to appoint the special servicer, the institution that controls the workout process. KELLOGG SCHOOL OF MANAGEMENT 3 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 billion to $800 billion between mid-2004 and mid-2007. The tremendous growth of commercial mortgage debt was a result of an increased demand fueled by an increase in commercial property prices that was, in part, accommodated by looser underwriting standards by commercial real estate lenders. The decline in commercial property prices and the tightening of commercial mortgage underwriting standards since late 2007 accompanied a rapid increase in the default rates on previously issued commercial mortgage loans (Exhibit 5). As a result, the primary market for new CMBS all but disappeared in 2008 and 2009 and balance sheet lenders retrenched. Mortgage Lending Opportunities FIA had established contacts throughout the commercial real estate finance industry, and as a result, Greenwood felt confident that it could place UPL's $5.8 million by directly lending to property owners. With the banking industry still in retrenchment, most of available capital targeting real estate debt was focused on the highest-quality property in large markets. The size of UPL's investment would require it to focus on the underserved Class-B and Class-C properties and/or secondary and tertiary markets. By making two to three loans, Greenwood was confident that within three months she could lend UPL's $5.8 million secured against commercial real estate collateral. As part of her responsibilities, she was in constant communication with mortgage brokers and had a good sense where the lending market was at present (Exhibit 6). An investment of this kind would require the solicitation of loan applications, property-level underwriting, and the potential to manage a debt renegotiation if the borrower did not repay what was promised. Such was mortgage lending, however, and UPL's significant balance sheet lending experience would be useful. The pending offering of CMBS offered Greenwood an alternative approach to acquiring exposure to commercial real estate debt. CMBS 2.0 As Greenwood read through the offering documents, it became clear almost immediately that the bonds being offered by RBSCF 2010-MB1 were fundamentally different than CMBS bonds sold prior to the crisis. \"I suppose that is why they are calling this CMBS 2.0,\" she mused to herself. The most notable difference between this offering and those prior to the downturn was that there were no bonds rated below investment grade, which avoided the need for the lead underwriter, The Royal Bank of Scotland (RBS), to find a B-piece buyer (Exhibit 7). The second obvious difference was that the loan pool consisted of only six loans, with a total outstanding mortgage balance of just under $310 million. Greenwood's instinct told her that the small loan pool might lack the diversification of earlier deals, although the small number of loans meant that a complete underwriting of the pool's cash flows was feasible. Later in the week, Greenwood participated in the investor conference call organized by RBS. She was somewhat surprised that more than one hundred different firms were on the call, but it was hard to determine whether this represented true interest in the bonds or whether most of the 4 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING participants were real estate professionals simply curious about how new commercial mortgages were being underwritten post-crisis. Questions on the call tended to focus on the assets and loan characteristics rather than on bond specifics, and based on her familiarity with commercial mortgage underwriting prior to the crisis, Greenwood realized that there was only so much one could learn from underwritten loan-to-value (LTV), debt service coverage ratios (DSCR),3 and debt yields.4 This made her pause and think back to her real estate finance professor, who often cautioned, \"Skilled financial analysts can make a spreadsheet justify anythingso think carefully about your assumptions.\" If she planned to recommend an investment in these bonds, she would have to look at the underlying leases, tenants, and economic conditions, among other things. Although the deal documents were extensive, after a few hours Greenwood was able to organize what she thought would be the most relevant information underlying each of the six loans in the deal (Exhibit 8 through Exhibit 13). This information captured details on the loans, properties, leases, tenants, and financials, both historical and underwritten. Recommendation UPL was expecting Greenwood's recommendation very soon. She needed to decide whether to recommend individual mortgage loans or CMBS. Making individual mortgage loans generated a set of promised cash flows in exchange for a fixed investment. The loans had the potential to generate high coupon-based cash flows and higher expected returns, but only because they were typically higher risk. The typical commercial mortgage was often no better than a BB-rated investment. On the other hand, the bonds in the CMBS offering allowed UPL to target a particular level of risk, and all of the bonds were investment grade. This suggested that loss rates over the five-year investment period would be less than those in a direct mortgage portfolio (Exhibit 14). However, it was impossible to know what return would be realized from a bond investment because the prices on the bonds were not yet known. Although it was true that AAA-rated bonds typically sold at par, the lower-rated tranches would certainly be sold at a discount. If she were to advocate the purchase of any of the lower-rated CMBS, Greenwood would have to determine the price at which the bonds would yield a risk-adjusted return superior to traditional lending. 3 The DSCR measures the ratio of the income generated by the property (through rents collected, etc.) to the debt service required by the loan. Thus, higher values of DSCR, all else being equal, imply a safer loan. 4 Debt yields express the ratio of the underlying property income (NOI) divided by the outstanding first mortgage balance. KELLOGG SCHOOL OF MANAGEMENT 5 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 Exhibit 1: Consolidated Balance Sheet of United Principal Life ($ in thousands) Cash, cash equivalents, and short-term securities 40,195 Fixed-income securities 224,820 U.S. Treasuries 37,264 Corporate bonds 160,978 RMBS 27,362 CMBS 17,216 Equity securities Mortgages secured by income-producing property Policy loans 20,392 123,685 15,561 Other assets 9,158 Total assets 451,811 Insurance contract liabilities 400,382 Other liabilities 19,350 Equity 32,079 Total liabilities and equity 451,811 Note: As of December 31, 2009. 6 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING Exhibit 2: Investment Policy Statement of United Principal Life (abridged) SECTION III: BOND INVESTING Our strategy is to create a Fixed Income Investment Program to achieve the following three objectives: (a) To reduce the risk of the overall investment portfolio because bonds have lower risk than other major asset classes, (b) to earn an annualized net (after fees and expenses) rate of return that exceeds the Barclays Capital U.S. Universal Bond Index over rolling five- to sevenyear periods by 10-20 basis points, with expected tracking error of 0.5 percent to 1 percent, (c) to serve as a source of liquidity for making claims payments and for rebalancing purposes. Investments in the FIIP may include all sectors of the fixed-income market included in the Barclays Capital U.S. Aggregate Bond Indexa broad measure of the U.S. dollar-denominated, investment-grade, taxable bond market. Also permitted are other investment-grade sectors such as municipal bonds, collateralized mortgage obligations (CMOs) such as RMBS and CMBS, and Rule 144A securities. FIIP investments are to be diversified so that no more than 15 percent is invested in one industry (does not apply to U.S. government securities). No more than a maximum of 5 percent of the FIIP may be invested in securities of any one corporation. Securities issued under Rule 144A (nonregistered debt) are limited to 20 percent of the market value of the FIIP portfolio. Private placement securities are limited to 5 percent of the market value of the portfolio. SECTION VI: DIRECT MORTGAGE INVESTING Our strategy is to create a Mortgage Investment Program to generate a diversified portfolio of high-quality mortgage investments secured by income-producing property. The returns on these investments are expected to compare favorably to those of alternative fixed-income investments. The MIP shall have a \"core\" risk/return orientation and, therefore, the program will target loan investments that (1) have creditworthy borrowers and (2) mortgages secured by real property. The primary strategy of the MIP is to make loan originations that are underwritten using the standard loan due diligence process so risks are identified, evaluated, and priced accordingly. Risks may include borrower credit, tenancy, lease-up, rollover, location, property type, market, submarket, and transaction structure. Term, amortization, and rollover risk will be structured to maximize the probability of exit at loan maturity. Additionally, mortgage loans should be structured in an effort to provide limited principal risk and significant call protection. In particular, mortgage loans will be locked to prepayment for a portion of the term then open to prepayment with the payment of a fee, the greater of 1 percent of the loan balance or UST based yield maintenance at like-term UST rates plus 50 basis points. Preservation of capital is an important objective of the Funds' Mortgage Participation Program. As such, high-quality, fixed-rate loans generally are preferred. No participating loans, mezzanine debt, or second mortgage loans are permitted under this policy. Moderate leasing risk is acceptable. Substantial preleasing will be required on forward commitment loans. Loans on operating properties generally require higher, stabilized levels of occupancy of at least 85 percent. KELLOGG SCHOOL OF MANAGEMENT 7 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 Exhibit 2 (continued) MIP investments should provide reasonable diversification by geographic location. MIP investments are subject to a minimum debt service coverage ratio of 1.25:1.0, a maximum LTV of 70 percent based on the underwritten valuation, and supported by a satisfactory appraisal prepared by an approved MAI. Loan coupon rates, generally speaking, should generate spreads of 200-400 basis points over common-maturity UST. Given current conditions, spreads are expected to approach the upper boundary of the range. Mortgage loans will be nonrecourse, except for standard carve-out provisions, such as fraud, misrepresentation, misapplication of funds, and environmental issues, guaranteed by acceptable credits. All lending will be subject to an independent appraisal as well as engineering and environmental reviews. Exhibit 3: The CMBS Process Source: Commercial Real Estate Finance Council. 8 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING Exhibit 4: Primary Sources of Commercial Mortgage Credit ($ in billions) 2000 1800 1600 1400 1200 1000 800 600 400 200 Commercial mortgages held by banks 201003 200912 200909 200906 200903 200812 200809 200806 200803 200712 200709 200706 200703 200612 200609 200606 200603 200512 200509 200506 200503 200412 200409 200406 0 Securitized commercial mortgages Source: Federal Reserve. KELLOGG SCHOOL OF MANAGEMENT 9 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 Exhibit 5: Default Rates of Commercial Mortgage Loans 14 12 10 8 6 4 2 0 Mar04 Mar05 Mar06 Mar07 Commercial banks Mar08 Mar09 Mar10 CMBS Source: Federal Reserve, Commercial Real Estate Finance Council. Exhibit 6: Summary of Prevailing Commercial Mortgage Lending Terms Collateral: Stabilized commercial properties Min. amount: $1 million Max. amount: $5 million Loan term: 5-10 years Maximum amortization: 30 years Maximum LTV: 70% Minimum debt service coverage: 1.25x Minimum debt yield: 11%-14% Coupon: 6.5-7.5% for 50-59% LTV; 7.5-8.5% for 60-69% LTV Origination fee: 100 basis points Other fees: $15,000 application fee plus lender expenses Assumability: Subject to lender approval and assumption fee Prepayment: After 24th month, with yield maintenance 10 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING Exhibit 7: RBSCF 2010-MB1 Deal Structure Property types: Retail (66.3%), office (32.7%), and industrial (1%). Concentrations: Texas (37.8%) and New York (23.4%). Loan contributors: RBS (76.6%) and Natixis (23.4%). Largest loans: A $77.7 million loan to Macerich on the 1 million-sf South Plains Mall in Lubbock, Texas; a $72.6 million loan to Harbor Group Investors on the 1.1 million-sf office building at Four New York Plaza in New York; a $64.8 million loan to Cole Credit Property on fifty-three single-tenant retail properties, encompassing 827,000 sf, in 20 states; a $35.6 million loan to Cole Credit Property on twenty-one single-tenant retail properties and an industrial/flex property, encompassing 599,000 sf, in eleven states; a $30.3 million loan to a Developers Diversified Realty partnership on three shopping centers, encompassing 381,000 sf, in three states; and a $28.7 million loan to Rao Yalamanchili on the 750,000-sf Bank of America Plaza office building in St. Louis. Notes: The first multi-borrower CMBS transaction since June 2008. Amount: $309.7 million Seller/borrowers: RBS, Natixis Lead managers: RBS, Natixis Co-managers: Bank of America, Barclays, Citigroup Master servicer: Wells Fargo Special servicer: Wells Fargo Trustee: Citigroup Certificate Admin.: Wells Fargo Offering type: Rule 144A Class ($ in millions) Rating (Moody's) Rating (Realpoint) Initial PassThrough Rate Subordination Maturity Date Average Life (Years) Note Type A-1 20 Aaa AAA 2.36700% 22.25 4/15/24 2.49 Fixed A-2 220.791 Aaa AAA 3.68600% 22.25 4/15/24 4.93 Fixed B 18.575 Aa2 AA 4.63049% 16.25 4/15/24 4.98 Fixed C 20.9 Aa2 A 4.66349% 9.5 4/15/24 4.98 Fixed D 29.434 Baa3 BBB- 4.66349% 0 4/15/24 4.98 Fixed 259.366 Aaa AAA 1.01156% 4/15/24 4.41 Fixed X(IO) Source: Commercial Mortgage Alert, offering circular. KELLOGG SCHOOL OF MANAGEMENT 11 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 Exhibit 8: South Plains Mall Loan Information Originator: Property Information The Royal Bank of Scotland plc Single Asset/Portfolio: April 11, 2015 Sponsor(s): The Macerich Partnership, L.P. Mortgage Asset Loan Interest Rate: 4.27000000% Interest Calculation: Actual/360 Amortization Term: 360 months(1) Call Protection: Prepayment locked out through and including the Due Date in April 2011; Prepayment Charge equal to the greater of yield maintenance or 1% from the Due Date in May 2011 through and including Due Date in October 2014; open from th e Due Date in November 2014 through the Maturity Date. $27,300,000 Deferred Maintenance: Yes(2) Tax and Insurance: Yes(3) TI/LC: Yes(4) Capital Expenditures: Up-Front Reserves: Fee Simple Major Tenants Dillard's JC Penney Beall's Ratings (S/M/F) B-/B3/BBBB/Ba1/BBB-/-/- NRA 257,569 218,518 40,000 % of Total NRA 25.2% 21.4% 3.9% Lease Expiration 01/31/2012 07/31/2012 01/31/2017 Yes(5) Property Management: Macerich Property Management Company LLC 2007 NOI / DSCR: $12,851,347 2.80x 2008 NOI / DSCR: $12,713,741 2.77x 2009 NOI / DSCR: Additional Debt Mezzanine: 89.6% Fee or Leasehold: Maturity Date: 84.8% (02/28/2010) U/W Occupancy: May 11, 2010 1,022,692 Occupancy (as of): First Payment Date: 1972 / 2009 NRA: Refinance Lubbock, Texas Year Built/Renovated: Loan Purpose: Retail - Super Regional Mall Location: $77,700,000 ($75.98 psf) Single Asset Property Type: Cut-Off Date Securitized Principal Balance ($/NRA): $13,163,495 2.86x U/W Net Operating Income: $13,015,058 U/W Net Cash Flow: $12,442,443 Appraised Value: $158,000,000 March 1, 2010 Appraisal Date: Cut-Off Date Total Debt Loan per NRA: $75.98 $75.98 $102.67 LTV: 49.2% 49.2% 66.5% Debt Yield (7): 16.9% 16.9% 12.5% 2.83x 2.83x 1.67x U/W NCF DSCR (8): 2.71x 2.71x 1.60x Yes(3) Yes(4) Capital Expenditures: Excess Cash Flow: Lockbox: Cut-Off Date Whole Loan Balance U/W NOI DSCR (8): Tax and Insurance: TI/LC Ongoing Reserves: Cut-Off Date Securitized Principal Balance (5) Yes Springing (6) Hard, Springing Cash Management (6) 12 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING Exhibit 8 (continued) Lease Expiration Schedule Number of Leases Expiring Year of Expiration 2010 ................................. 2011 ................................. 2012 ................................. 2013 ................................. 2014 ................................. 2015 ................................. Thereafter ......................... Vacant.............................. Total ................................ 69 23 15 9 10 11 34 NAP 171 Expiring SF 77,149 30,098 511,077 11,703 24,422 44,395 168,848 155,000 1,022,692 % of Total NRA 7.5% 2.9 50.0 1.1 2.4 4.3 16.5 15.2 100.0% Cumulative Expiring SF Cumulative % of Total NRA 77,149 107,247 618,324 630,027 654,449 698,844 867,692 1,022,692 1,022,692 7.5% 10.5% 60.5% 61.6% 64.0% 68.3% 84.8% 100.0% 100.0% Major Tenant Summary (Collateral Tenants) Ratings(1) Moody's/S&P/ Fitch SF % of Property NRA(2) Underwritten Rent PSF B3/B-/BBBa1/BB/BBB-/-/- 257,569 218,518 40,000 25.2% 21.4 3.9 $2.15 $1.85 $3.90 $553,064 404,945 156,060 5.0% 3.7 1.4 January 31, 2012 July 31, 2012 January 31, 2017 -/-/-/-/- 34,500 15,419 566,006 3.4 1.5 55.3% $16.96 $16.47 $3.45 585,000 253,905 $1,952,974 5.3 2.3 17.7% February 1, 2020 February 28, 2018 Non-Top 5 Tenants ...... 301,686 29.5% $30.16 $9,099,766 82.3% Occupied Total ............. 867,692 84.8% $12.74 $11,052,740 100.0% Tenant Top 5 Tenants Dillard's .......................... JC Penney ....................... Beall's ............................. Barnes & Noble Booksellers ................ Forever 21....................... Total Top 5 Tenants .. Vacant Space................. 155,000 1,022,692 % of Underwritten Rent(2) Lease Expiration 15.2% Property Total .............. Underwritten Annual Base Rent 100.0% (1) (2) Certain ratings are those of the pa rent company whether or not the parent company guarantees the lease. May not add to 100% due to rounding. KELLOGG SCHOOL OF MANAGEMENT 13 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 Exhibit 8 (continued) The Loan. This Whole Loan (the \"South Plains Mall Whole Loan\") was originated by The Royal Bank of Scotland plc on March 31, 2010. The South Plains Mall Whole Loan is secured by a first priority mortgage and deed of trust (the \"South Plains Mall Mortgage\") encumbering the South Plains Mall Borrower's fee interest in one (1) property, located in Lubbock, Texas (the \"South Plains Mall Property\" ). The South Plains Mall Whole Loan matures on April 11, 2015. The Borrower. The borrower under the South Plains Mall Whole Loan (the \"South Plains Mall Borrower\" ) is a special purpose entity, that is (directly or indirectly) owned by separate entities, which are ultimately controlled by The Macerich Partnership, L.P., the sponsor of the South Plains Mall Whole Loan. The Macerich Company operates as a real estate investment trust (REIT) in the United States that owns and operates substantially all of its assets through by The Macerich Partnership L.P. As of December 31, 2009, the company and its affiliates owned or had ownership interests in 72 regional shopping centers and 14 community shopping centers totaling approximately 75 million square feet. The Macerich Partnership L.P. will serve as the nonrecourse carve-out guarantor for the South Plains Mall Whole loan. The Property. The South Plains Mall Property is a two-story, 1,022,692 square foot, Class B+, super regional mall located in Lubbock, Texas which was constructed in 1972 and upgraded since acquisition by affiliates of the sponsor, including over $7,000,000 of capital investment in 2009 (the majority of which was attributable to the new Barnes & Noble store). As of February 28, 2010, the South Plains Mall Property is approximately 84.8% leased (92.2% excluding the dark Mervyn's building). Tenants include four anchors comprised of JC Penney, Dillard's Store for Men and Children, Dillard's Store for Women and Beall's (totaling approximately 516,087 square feet). The South Plains Mall Property currently has more than 155 in-line and specialty tenants, kiosk, and temporary tenants (totaling approximately 351,605 square feet). Additionally, Sears anchors the west side of the South Plains Mall Property with a company-owned store, and Home Depot has an outparcel store that is also company-owned, neither of which serve as collateral for the South Plains Mall Whole Loan. At closing, the collateral included a vacant Mervyn's store. The South Plains Mall Property was acquired by The Macerich Company in 1998 at a cost of $115.8 million. Proceeds of the South Plains Mall Whole Loan will be used to repay an existing first mortgage loan in the amount of $51.0 million with excess proceeds applied to the reduction of The Macerich Company's unsecured credit facilities and the return of equity to investors. The Macerich Company's cumulative cost basis in the South Plains Mall Property is $134.0 million and its depreciated basis as of year end 2008 was $99.0 million. The South Plains Mall Property is currently undergoing a $1.82 million renovation to the food court area to update it to a more current layout, tenant mix and suite size including adding new permanent national tenants. The Macerich Company has reportedly invested over $11.0 million in renovation to the South Plains Mall Property over the last 3 years. The lender escrowed approximately $3,000,000 in cash escrows for roof replacement to be carried out over the next 1 to 4 years. Property Management. The South Plains Mall Property is managed by Macerich Property Management Company LLC (the \"South Plains Mall Manager\"), an affiliate of the South Plains Mall Borrower, pursuant to a management agreement (the \"South Plains Mall Management Agreement\"). Under the terms of the related loan documents, all fees payable to the South Plains Mall Manager under the South Plains Mall Management Agreement are subordinate to the South Plains Mall Whole Loan. The South Plains Mall Management Agreement has no finite term but is, in addition to other termination events, cancellable upon 30 days' notice. The lender has the 14 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING Exhibit 8 (continued) right to cause the South Plains Mall Borrower to terminate the South Plains Mall Manager upon the occurrence of certain events, including: (a) the gross negligence, intentional malfeasance or willful misconduct of the South Plains Mall Manager or any event of default by the South Plains Mall Manager under the South Plains Mall Management Agreement; (b) the occurrence and continuation of an event of default under the South Plains Mall Whole Loan, or (c) upon the DSCR for the South Plains Mall Property falling below 1.00x (unless such decline is due to \"market conditions\"). The South Plains Mall Borrower has the right, without consent or approval from the lender, to cause the South Plains Mall Management Agreement to be assigned by the South Plains Mall Manager to an affiliate of the South Plains Mall Borrower, subject to satisfaction of certain conditions in the loan documents. Appraisal. In connection with the origination of the South Plains Mall Whole Loan, Cushman & Wakefield performed an appraisal of the South Plains Mall Property on behalf of the Originator. In the resulting narrative report, and subject to the assumptions, limiting conditions, certifications and definitions contained therein, the appraiser concluded that the \"as-is\" leased-fee value for the South Plains Mall Property as of March 1, 2010 was $158,000,000. The appraisal states that it was prepared in accordance with the Uniform Standards of Professional Appraisal Practice and FIRREA. Payment Terms; Interest Rate. The South Plains Mall Whole Loan amortizes over a 30-year term. The Interest Rate on the South Plains Mall Whole Loan is calculated on an Actual/360 Basis and is equal to 4.27000000% per annum. The Due Date under the South Plains Mall Whole Loan is the 11th day of each month, or if such day is not a Business Day, the immediately preceding Business Day. Mezzanine Debt: A $27,300,000 mezzanine loan (the \"South Plains Mall Mezzanine Loan\") has been made to Macerich South Plains Mezz LP secured by a pledge of the related mezzanine borrower's direct and indirect interest in the South Plains Mall Borrower. In the event that the mezzanine borrower prepays the South Plains Mall Mezzanine Loan as a result of the South Plains Mall Mezzanine Lender withholding its consent to certain transfers of the direct and interest in the South Plains Mall Borrower or mezzanine borrower, an affiliate of the South Plains Mall Borrower may incur a replacement mezzanine loan on terms substantially similar to the existing mezzanine loan, provided a Rating Agency Confirmation is obtained for such replacement mezzanine loan. Terms of South Plains Mall Mezzanine Loan. The South Plains Mall Mezzanine Loan matures on the same maturity date as the South Plains Mall Whole Loan. The South Plains Mall Mezzanine Loan requires the South Plains Mall Mezzanine Borrower to make monthly payments of interest during its term, and the applicable amortization payment then due, if any. KELLOGG SCHOOL OF MANAGEMENT 15 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 Exhibit 9: Four New York Plaza Property Information Loan Information Originator: Single Asset/Portfolio: Single Asset Property Type: Natixis Real Estate Capital Inc. Office - CBD Cut-Off Date Securitized Principal Balance ($/NRA): $72,600,000 ($68.12 psf) Location: New York, New York Loan Purpose: Acquisition Year Built: 1968 NRA: 1,065,796 (6) Occupancy (as of): 74.9% (4/01/2010) U/W Occupancy: 74.9% (7) Fee or Leasehold: Fee First Payment Date: March 9, 2010 Maturity Date: February 9, 2015 Sponsor: Harbor Group Investors Mortgage Asset Interest Rate: 6.18068182% Interest Calculation: Actual/360 Amortization Term: Interest Only Call Protection: Prepayment locked out until 2 years after the Closing Date; U.S. Treasury defeasance following 2 years after the Closing Date through and including the Due Date in November 2014; open from the Due Date in December 2014 through the Maturity Date (1) Additional Debt: B-Note Principal Balance B-Note Interest Rate Tax and Insurance: Ratings (S/M/F) A+/Aa3/AA- % of Total NRA 74.9% NRA 797,949 Lease Expiration 01/31/2025 Property Management: Harbor Group Management Co. 2007 NOI/DSCR: NAV(8) NAV(8) 2008 NOI/DSCR: NAV(8) NAV(8) 2009 NOI/DSCR: $4,400,000 10.5% Up-Front Reserves: Major Tenants JPMorgan Chase Bank, National Association (8) NAV NAV(8) (10) U/W Net Operating Income: Yes(2) $7,612,930 U/W Net Cash Flow: $7,346,481(10) $110,000,000 TI/LC: Yes Appraised Value: Capital Expenditures: Yes(4) Appraisal Date: Tax and Insurance: Yes(2) Excess Cash Flow: Springing (5) (3) January 1, 2010 Cut-Off Date Whole Loan Balance Cut-Off Date Total Debt $68.12 $72.25 $72.25 LTV: 66.0% 70.0% 70.0% Debt Yield (9): 10.5% 9.9% 9.9% U/W NOI DSCR (10): 1.67x 1.52x 1.52x U/W NCF DSCR (10): Lockbox: Cut-Off Date Securitized Principal Balance Loan per NRA: Ongoing Reserves: 1.61x 1.46x 1.46x Hard, In-Place Cash Management Lease Expiration Schedule Year of Expiration Number of Leases Expiring Expiring SF 2025 .................................. Vacant .............................. Total ................................ 1 NAP 1 797,949 267,847 1,065,796 (1) % of Total NRA 74.9% 25.1 100.0% Cumulative Expiring SF 797,949 1,065,796(1) 1,065,796 (1) Cumulative % of Total NRA 74.9% 100.00% 100.00% 16 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING Exhibit 9 (continued) Major Tenant Summary (Collateral Tenants) Ratings (1) Tenant Moody's/S&P/Fitch SF Aa3/A+/AA- 797,949 797,949 267,847 1,065,796 (2) JPMorgan Chase Bank, National Association .......... Occupied Total....................... Vacant Space ......................... Property Total ...................... (1) (2) % of Property NRA 74.9% 74.9% 25.1% 100.0% Underwritten Rent PSF $28.01 $28.01 % of Underwritten Rent 100.00% 100.00% Lease Expiration January 31, 2025 Certain ratings are those of the parent company whether or not the parent company guarantees the lease. Net Rentable Area. Total GLA at the Four New York Plaza Property, including 19,476 square feet of unleasable space, is 1,085,272 square feet. Summary of Property Financials In-Place Underwritten Net Cash Flow Occupancy Effective Gross Income Expenses Net Operating Income Underwritten Reserves Underwritten Net Cash Flow Stabilized Underwritten Net Cash Flow 74.9% $26,192,091 18,579,161 $7,612,930 266,449 $7,346,481 89.9% $31,770,232 19,678,860 $12,091,372 1,425,515 $10,665,857 The Loan. This Whole Loan (the \"Four New York Plaza Whole Loan\") was originated by Natixis Real Estate Capital Inc. on January 11, 2010. The Four New York Plaza Whole Loan is secured by a first priority mortgage (the \"Four New York Plaza Mortgage\") encumbering the fee interest in the property, located in New York, New York (the \"Four New York Plaza Property\"). The Four New York Plaza Whole Loan matures on February 9, 2015. The Borrower. The borrower under the Four New York Plaza Whole Loan (the \"Four New York Plaza Borrower\") is a special purpose entity that is directly owned by separate entities, which are ultimately controlled by Harbor Group Investors, the sponsor of the Four New York Plaza Whole Loan. Harbor Group Investors (\"Harbor Group\") is a private real estate investment and management group, whose owners control a portfolio of 57 office, retail, hotel and multifamily properties encompassing more than 8 million square feet of commercial space and more than 11,000 apartment units in the United States and abroad. Harbor Group's headquarters are located in Norfolk, Virginia and it employs more than 400 professionals in New York, Chicago, London and Tel Aviv. Certain affiliates of the sponsor will serve as the non-recourse carve-out guarantors for the Four New York Plaza Whole Loan. The Property. Harbor Group purchased the Four New York Plaza Property for $107,000,000 in January 2010. The Four New York Plaza Property is a 1,065,796 square foot office property that was constructed in 1968. The Four New York Plaza Property is a 22-story class-A minus office building located at the south east corner of Water Street and Broad Street. Since 2004, the Four New York Plaza Property has undergone more than $18 million in capital improvements, including a recent $12 million upgrade of the electrical and HVAC infrastructure, completed in KELLOGG SCHOOL OF MANAGEMENT 17 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 Exhibit 9 (continued) November 2009. The Four New York Plaza Property benefits from a state-of-the-art uninterruptible power supply that allows for the installation of reliable datacenters, a highly sought after attribute for financial institutions. Due to this feature, the Four New York Plaza Property was among the few properties that kept running during the 2003 electricity black-out in New York City. The typical floor plates at the Four New York Plaza Property are approximately 48,000 square feet of unobstructed interior space due to the convenient location of the elevators and infrastructure in a side column of the building. JPMorgan Chase Bank, National Association (\"JPMorgan\") and its predecessor institutions occupied 100% of the Four New York Plaza Property from completion until the sale to Harbor Group in January 2010. Subsequent to the sale and as of April 1, 2010, the Four New York Plaza Property was approximately 74.9% occupied by JPMorgan. Property Management. The Four New York Plaza Property is managed by Harbor Group Management Co (the \"Four New York Plaza Manager\") pursuant to a management agreement (the \"Four New York Plaza Management Agreement\"). Under the terms of the related loan documents, all fees payable to the Four New York Plaza Manager under the Four New York Plaza Management Agreement are subordinate to the Four New York Plaza Whole Loan. The lender will have the right to terminate the Four New York Plaza Manager upon the occurrence of certain events, including: (a) the occurrence and continuation of an event of default under the Four New York Plaza Whole Loan, (b) failure, as of the end of any two (2) calendar quarters, of the Four New York Plaza Borrower to maintain a debt service coverage ratio of at least 1.10x, or (c) the occurrence and continuation of an event of default under the Four New York Plaza Management Agreement by the Four New York Plaza Manager. Appraisal. In connection with the origination of the Four New York Plaza Whole Loan, Cushman & Wakefield, Inc. performed an appraisal of the Four New York Plaza Property on behalf of the originator. In the resulting narrative report, and subject to the assumptions, limiting conditions, certifications and definitions contained in the appraisal, the appraiser concluded that the as-is leased fee value for the Four New York Plaza Property as of January 1, 2010 was $110,000,000. The appraiser also concluded an as-stabilized property value for the Four New York Plaza Property as of January 1, 2014 of $160,000,000. The appraisal states that it was prepared in accordance with the Uniform Standards of Professional Appraisal Practice and FIRREA. Payment Terms; Interest Rate. The Four New York Plaza Whole Loan is an Interest Only Loan. The Interest Rate on the Four New York Plaza Whole Loan is calculated on an Actual/360 Basis and is equal to 6.4275% per annum. The Interest Rate on the $72,600,000 Mortgage Asset is calculated on an Actual/360 Basis and is equal to 6.18068182% per annum. The Due Date under the Four New York Plaza Whole Loan is the 9th day of each month, or if such day is not a Business Day, the immediately preceding Business Day. Subordinate Debt. The Note related to the Four New York Whole Loan is split in to an ANote, which is the Four New York Plaza Mortgage Asset, and a B-Note, which has a principal balance of $4,400,000. 18 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING Exhibit 10: Cole Credit Property Trust Retail Portfolio I Loan Information Originator: Property Information The Royal Bank of Scotland plc Single Asset/Portfolio: Sponsor(s): Cole Credit Property Trust, Inc. Mortgage Asset Interest Rate: 4.23600000% Interest Calculation: 360 months (1) Call Protection: Prepayment locked out through and including the Due Date in April 2011; Prepayment Charge equal to the greater of yield maintenance or 1% from the Due Date in May 2011 through and including Due Date in October 2014; open from the Due Date in November 2014 through Maturity Date. Major Tenants: See \"Tenant Summary\" below. Property Management: Cole Realty Adviso rs, Inc. 2007 NOI/DSCR: $6,428,386 3.06x 2008 NOI/DSCR: $6,388,708 3.05x 2009 NOI/DSCR: $6,482,346 3.09x $6,123,338 Actual/360 Amortization Term: Fee Simple U/W Net Operating Income: April 11, 2015 96.1% Fee or Leasehold: Maturity Date: 100.0% (04/01/2010) U/W Occupancy: May 11, 2010 598,847 Occupancy (as of): First Payment Date: Various / Various NRA: Refinance Various Year Built/Renovated: Loan Purpose: Retail - Retail/Industrial Location: $35,600,000 ($59.45 psf) Portfolio Property Type: Cut-Off Date Securitized Principal Balance ($/NRA): Additional Debt U/W Net Cash Flow: $5,734,088 Deferred Maintenance: Yes(2) Appraised Value: $72,680,000 Taxes and Insurance: Yes(3) Appraisal Date: Various (8) Capital Expenditures: Mezzanine: Up-Front Reserves: Yes(4) $16,025,000 TI/LC: Ongoing Reserves: Tax and Insurance: Capital Expendit ures: TI/LC: Yes(5) Springing (3) Cut-Off Date Securitized Principal Balance Yes(4) (5) Yes Cut-Off Date Whole Loan Balance Cut-Off Date Total Debt Excess Cash Flow: Loan per NRA: $59.45 $59.45 $86.21 Springing (7) LTV: 49.0% 49.0% 71.0% Debt Yield (9): 18.2% 18.2% 12.6% U/W NOI DSCR (10): 2.92x 2.92x 1.44x U/W NCF DSCR (10): Lockbox: Springing (6) Conn's Tenant Reserve: 2.73x 2.73x 1.35x Hard, Springing Cash Management (6) KELLOGG SCHOOL OF MANAGEMENT 19 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING Exhibit 10 (continued) Property Lowe's Texas City....................... Lowe's Jonesboro........................ Apria Healthcare Indianapolis ...... Conn's Austin (W. Anderson) ...... Conn's Austin (Pecan Park) ......... Best Buy Tupelo.......................... Rite Aid Bangor .......................... CVS Independence ...................... CVS Duncanville......................... Rite Aid Philadelphia................... Rite Aid Warren .......................... Walgreens Lawrence ................... Walgreens Houston ..................... Walgreens Cahokia...................... Conn's Hurst ............................... Rite Aid Murfreesboro ................. Rite Aid Buxton .......................... Walgreens Cleveland ................... Rite Aid Wheelersburg ................ Sherwin-Williams Angola............ Sherwin-Williams Boardman ....... Sherwin-Williams Ashtabula........ Total/Wtd. Avg. ......................... KEL757 Tenant Summary Square Feet of NRA Location Texas City, TX Jonesboro, AR Indianapolis, IN Austin, TX Cedar Park, TX Tupelo, MS Bangor, ME Independence, MO Duncanville, TX Philadelphia, PA Warren, OH Lawrence, KS Houston, TX Cahokia, IL Hurst, TX Murfreesboro, TN Buxton, ME Cleveland, OH Wheelersburg, OH Angola, IN Boardman, OH Ashtabula, OH Year Built 132,473 126,405 83,610 24,960 24,960 20,045 13,100 11,365 11,332 11,361 11,267 12,885 12,851 13,422 25,414 11,200 11,180 13,380 11,227 5,010 6,000 5,400 598,847 Percent Leased Appraised Value 1995 1993 1994 2002 2002 2005 1998 2000 2000 1999 1999 1992 1993 1994 2004 1998 1998 1994 1998 2001 2003 2003 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% $9,350,000 8,100,000 5,940,000 4,370,000 4,240,000 3,700,000 3,700,000 3,430,000 3,200,000 3,200,000 3,100,000 2,640,000 2,280,000 2,270,000 2,400,000 2,450,000 2,100,000 1,950,000 1,800,000 1,010,000 800,000 650,000 $72,680,000 Underwritten Net Cash Flow $750,599 649,835 453,430 316,840 307,151 254,172 309,753 267,099 225,591 280,520 265,627 202,842 164,116 178,379 163,290 239,090 175,904 164,545 154,207 84,602 69,188 57,309 $5,734,087 % of Total U/W NCF 13.1% 11.3 7.9 5.5 5.4 4.4 5.4 4.7 3.9 4.9 4.6 3.5 2.9 3.1 2.8 4.2 3.1 2.9 2.7 1.5 1.2 1.0 100.0% Lease Expiration Schedule Year of Expiration Number of Leases Expiring Expiring SF 0 0 0 0 1 6 3 12 NAP 22 0 0 0 0 12,885 177,458 221,093 187,411 0 598,847 MTM............................................ 2010 ............................................. 2011 ............................................. 2012 ............................................. 2013 ............................................. 2014 ............................................. 2015 ............................................. Thereafter ..................................... Vacant ......................................... Total ............................................ Cumulative Expiring SF 0.0% 0.0 0.0 0.0 2.2 29.6 36.9 31.3 0.0 100.0% Cumulative % of Total NRA 0 0 0 0 12,885 190,343 411,436 598,847 598,847 598,847 % of Total NRA 0.0% 0.0% 0.0% 0.0% 2.2% 31.8% 68.7% 100.0% 100.0% 100.0% Summary of Property Financials 2007 Year End 2008 Year End 2009 Underwritten Revenue Annual Base Rent ............................. Expense Recoveries .......................... Vacancy/Bad Debt ............................ Other Income.................................... $6,455,882 (13,436) 0 44,506 $6,477,963 26,770 0 666 $6,749,303 34,762 0 1,286 $6,570,289 0 (257,570) 0 Effective Gross Income ....................... $6,486,952 $6,505,399 $6,785,351 $6,312,720 Total Expenses .................................... $58,566 $116,691 $303,005 $189,382 Net Operating Income ......................... Capital Expenditures ......................... TI's & LC's ...................................... $6,428,386 0 0 $6,388,708 0 0 $6,482,346 0 0 $6,123,338 89,827 299,424 Total Capital Items.............................. $0 $0 $0 $389,251 Net Cash Flow .................................... $6,428,386 $6,388,708 $6,482,346 $5,734,087 20 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING Exhibit 10 (continued) The Loan. This Whole Loan (the \"CCPT Retail Portfolio I Whole Loan\") was originated by The Royal Bank of Scotland plc on April 1, 2010. The CCPT Retail Portfolio I Whole Loan is secured by first priority mortgages (collectively, the \"CCPT Retail Portfolio I Mortgage\") encumbering the fee interests in 22 properties, located in 11 states (each, a \"CCPT Retail Portfolio I Individual Property\" and collectively, the \"CCPT Retail Portfolio I Property\"). The CCPT Retail Portfolio I Whole Loan matures on April 11, 2015. The Borrower. The borrowers under the CCPT Retail Portfolio I Whole Loan (the \"CCPT Retail Portfolio I Borrower\") are 22 special purpose entities, which are ultimately controlled by Cole Credit Property Trust, Inc. (\"CCPT I\"), the sponsor of the CCPT Retail Portfolio I Whole Loan. For 30 years, Cole Real Estate Investments (\"Cole\"), parent company to CCPT I, has partnered with thousands of investors in the ownership of various types of commercial real estate. Since 1979, Cole has introduced over 100 real estate investment programs and manages a portfolio of properties valued at approximately $4.0 million across 45 states and the U.S. Virgin Islands. CCPT I currently maintains a portfolio of 42 fully occupied properties in 19 states with a weighted average remaining lease term of more than ten years. As of December 31, 2009, CCPT I had total stockholders' equity of $64.0 million and total liquidity of $1.9 million. CCPT I will serve as the non-recourse guarantor for the CCPT Retail Portfolio I Whole Loan. The Properties. The CCPT Retail Portfolio I Properties consist of twenty-one (21) singletenant retail properties and one single-tenant industrial property (combined totaling 598,847 square feet) and located in 11 states. The CCPT Retail Portfolio I Properties were acquired by Cole Credit Properties Trust, Inc. between August 2004 and September 2005 and the Sponsor's current cost basis in the CCPT Retail Portfolio I Properties is $84.2 million, which includes the acquisition costs for the CCPT Retail Portfolio I Properties as well as $318,750 in capital improvements. Proceeds of the CCPT Retail Portfolio I Whole Loan will be used to refinance existing acquisition debt. Cole Credit Properties Trust, Inc. will have $32.6 million of remaining cash equity in the transaction based upon its $84.2 million cost basis of the acquisition of the CCPT Retail Portfolio I Properties. The CCPT Retail Portfolio I Properties were built from 1992 through 2005, are 100% leased to 8 unique tenants. The CCPT Retail Portfolio I Properties are approximately 48% leased to investment-grade rated tenants (Lowe's, Walgreens, CVS and Sherwin-Williams). Property Management. The CCPT Retail Portfolio I Property is managed by Cole Realty Advisors, Inc., an Arizona corporation (f/k/a Fund Realty Advisors, Inc.) (the \"CCPT Retail Portfolio I Manager\"), an affiliate of the sponsor, pursuant to a management agreement (the \"CCPT Retail Portfolio I Management Agreement\"). Under the terms of the related loan documents, all fees payable to the CCPT Retail Portfolio I Manager under the CCPT Retail Portfolio I Management Agreement in connection with the CCPT Retail Portfolio I Property are subordinate to the CCPT Retail Portfolio I Whole Loan. The CCPT Retail Portfolio I Management Agreement expires on April 6, 2010, with one automatic renewal for another threeyear period. The lender will have the right to cause the CCPT Retail Portfolio I Borrower to terminate the CCPT Retail Portfolio I Manager upon the occurrence of certain events, including: (a) the occurrence and continuation of a material default under the CCPT Retail Portfolio I Whole Loan, (b) the CCPT Retail Portfolio I Manager's gross negligence, malfeasance or willful misconduct, (c) the occurrence and continuation of an event of default under the CCPT Retail Portfolio I Management Agreement, (d) the debt service coverage ratio of the CCPT Retail Portfolio I Property falling to less than 1.10x (unless such fall is due to \"market conditions\") or (e) the bankruptcy or insolvency of the CCPT Retail Portfolio I Manager. KELLOGG SCHOOL OF MANAGEMENT 21 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 Exhibit 10 (continued) Appraisal. In connection with the origination of the CCPT Retail Portfolio I Loan, CB Richard Ellis performed appraisals dated between February 12, 2010 to February 20, 2010 of each of the CCPT Retail Portfolio I Properties on behalf of the Originator. In the resulting narrative report, and subject to the assumptions, limiting conditions, certifications and definitions contained therein, the appraiser concluded that the as-is leased fee value for the CCPT Retail Portfolio I Properties was $72,680,000. The appraisal states that it was prepared in accordance with the Uniform Standards of Professional Appraisal Practice and FIRREA. Payment Terms; Interest Rate. The CCPT Retail Portfolio I Whole Loan is an Amortizing Loan. The Interest Rate on the CCPT Retail Portfolio I Whole Loan is calculated on an Actual/360 Basis and is equal to 4.23600000% per annum. The Due Date under the CCPT Retail Portfolio I Whole Loan is the 11th day of each month, or if such day is not a Business Day, the immediately preceding Business Day. Mezzanine Debt. A $16,025,000 mezzanine loan (the \"CCPT Retail Portfolio I Mezzanine Loan\") has been made to Cole MezzCo CCPT I, LLC, secured by a pledge of the related mezzanine borrower's direct and indirect equity interests in the CCPT Retail Portfolio I Borrower. Terms of CCPT Retail Portfolio I Mezzanine Loan. The CCPT Retail Portfolio I Mezzanine Loan matures on the same maturity date as the CCPT Retail Portfolio I Whole Loan. The CCPT Retail Portfolio I Mezzanine Loan requires the CCPT Retail Portfolio I Mezzanine Borrower to make monthly payments of interest during its term, and the applicable amortization payment then due, if any. 22 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 KEL757 COMMERCIAL MORTGAGE INVESTING Exhibit 11: Cole Credit Property Trust Retail Portfolio III Loan Information Originator: Property Information The Royal Bank of Scotland plc Single Asset/Portfolio: Sponsor(s): Cole Credit Property Trust III, Inc. Mortgage Asset Interest Rate: 4.20900000% Interest Calculation: 360 months (1) Call Protection: Prepayment locked out through and including the Due Date in April 2011; Prepayment Charge equal to the greater of yield maintenance or 1% from the Due Date in May 2011 through and including the Due Date in October 2014; open from the Due Date in November 2014 through the Maturity Date. Fee Simple Major Tenants: See \"Tenant Summary\" below. Property Management: Cole Realty Advisors, Inc. 2007 NOI/DSCR: NAV(7) NAV(7) 2008 NOI/DSCR: NAV(7) NAV(7) 2009 NOI/DSCR: NAV (7) NAV(7) U/W Net Operating Income: $10,536,738 $10,329,344 $139,015,000 Appraisal Date: Various (8) Actual/360 Amortization Term: 96.4% Appraised Value: April 11, 2015 100.0% (04/01/2010) U/W Net Cash Flow: Maturity Date: U/W Occupancy: Fee or Leasehold: May 11, 2010 827,316 Occupancy (as of): First Payment Date: Various / Various NRA: Acquisition Various Year Built/Renovated: Loan Purpose: Retail - Single Buildings Location: $64,800,000 ($78.33 psf) Portfolio Property Type: Cut-Off Date Securitized Principal Balance ($/NRA): Additional Debt: Mezzanine: $10,100,000 Yes(2) Yes(3) Capital Expenditures: Yes(4) TI/LC: Ongoing Reserves: Deferred Maintenance: Tax and Insurance: Up-Front Reserves: Yes(5) Tax and Insurance: Cut-Off Date Securitized Principal Balance Springing(3) Cut-Off Date Whole Loan Balance Cut-Off Date Total Debt $90.53 Capital Expenditures: Yes(4) Loan per NRA: $78.33 $78.33 TI/LC: Yes(5) LTV: 46.6% 46.6% 53.9% Debt Yield (9): 16.3% 16.3% 14.1% U/W NOI DSCR: (10) 2.77x 2.77x 2.07x U/W NCF DSCR: (10) 2.71x 2.71x 2.03x Excess Cash Flow: Lockbox: Springing (6) Hard, Springing Cash Management (6) KELLOGG SCHOOL OF MANAGEMENT 23 This document is authorized for use only in REE6200 - Real Estate Finance by Dr. Zonghu Wu, Florida International University from March 2015 to May 2015. For exclusive use Florida International University, 2015 COMMERCIAL MORTGAGE INVESTING KEL757 Exhibit 11 (continued) Tenant Summary Property Academy Sports Laredo Academy Sports Bossier City LA Fitness Carmel Academy Sports Fort Worth CVS SLB Sparks Walgreens Janesville Walgreens Spearfish Walgreens North Platte Walgreens Brooklyn Park CVS S/L Edinburg Walgreens Papillion Walgreens Chickasha Walgreens Machesney Park Walgreens Loves Park Aarons Pool 2 Killeen TX Tractor Supply Edinburg Tractor Supply Roswell Tractor Supply Del Rio Aarons Pool 3 Texas City TX Aarons Pool 3 Richmond VA Advance Auto Webster Advance Auto Humble Advance Auto Houston (Wallisville) Aarons Pool 3 Haltom City TX Advance Auto Kingwood Advance Auto Deer Park Advance Auto Houston Aarons Pool 3 Copperas C ove TX Aarons Pool 1 Humble TX Aarons Pool 2 Pasadena TX Aarons Pool 2 Livingston TX Aarons Pool 1 Minden LA Advance Auto Houston (Imperial) Advance Aut