Investors keep pouring in money, including locally

Like Pedro Martinez brushing back a batter to establish the inside of home plate, investors in commercial mortgage-backed securities pushed back slightly on the latest offering from Wachovia Bank, forcing wider pricing and innovation on its $1.4 billion securitization.

According to investors, the problem with the Wachovia offering was too much leverage and too many loans with a period of interest-only payments.

Create new class of bonds

In order to sell all the bonds efficiently, Wachovia's solution was to create a new class of AAA bonds that were dubbed "super-duper seniors" to make AAA investors feel more secure with the high-leverage loans in the offering.

Brushback aside, second-quarter CMBS volume is expected to set another record. Year-to-date volume will get a big boost from Goldman/RBS Greenwich and JP Morgan offerings planned for June. The $8 billion combined size of the offerings could make the deals the subject of a new documentary called "Super Size Me, Too."

These days, so much money is pouring into real estate that indeed, big is better. Another deal in the market is the $1.65 billion offering secured only by the Rockefeller Center in New York. To buy into a piece of "The Rock," AAA investors can expect to get about a 35-basis-point premium over like-termed treasuries.

Continued low rates

The flood of loans has been fueled by the continued low commercial mortgage rates, which now range from 5.10 percent to 5.35 percent for five-and 10-year mortgages, respectively, according to the Barron's/John B. Levy & Co. National Mortgage Survey. Of course, the low interest rates are allowing property prices to soar, and Richmond is no exception.

Particularly interesting is a sales contract for Riverfront Plaza, which perhaps implies a new price and buyer paradigm for Richmond.

Riverfront Plaza, the 910,000-square-foot behemoth owned by Boston Properties Inc. (NYSE: BXP), is under contract and expected to close this month for $247.1 million.

The buyer is rumored to be a foreign-based investor that has a satellite office in New York. Before this transaction, the buyer was known to invest in premier buildings throughout the world in premier locations.

$272 per square foot

The contract price, which is disclosed in quarterly SEC filings by Boston Properties, translates to an eye-popping $272 per square foot and tops the next-closest sale by almost $100 per square foot.

Other financial information disclosed by Boston Properties indicates the property was 91 percent occupied as of March 31 and had first-quarter net operating income of approximately $3.37 million. When annualized, that number implies the buyer is content with a 5.5 percent return on the investment.

Sure to weigh heavily on the buyer's already low returns while lining the city's coffers with additional revenue is the 2006 real estate tax expense.

According to tax records, the property is assessed at $165.5 million. Almost comically, Boston Properties successfully appealed the 2004 tax assessment and had it reduced from $176.4 million to $168 million, before the 2005 tax assessment came out even lower.

Assuming the 2006 assessment reflects the new purchase price and tax rates remain constant, the city will add approximately $1.15 million to its tax revenue on this property alone.

Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com.

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