The real estate market provided some wide-open spaces last week, with credit tenant lease and pass-through certificate transactions dominating the landscape. However, structural holes and pricing issues - exacerbating the inherent complications of any real estate-related transaction - have some investors running for the hills.

Credit Lyonnais Securities is behind a $325 million pass-through trust for tenant JPMorgan Chase Hambrecht & Quist. The transaction involves a 31-story office tower in San Francisco's South-of-Market financial district. JPMorgan Chase Hambrecht & Quist will occupy the entire building with the exception of 5,000 square feet of ground-floor retail space.

The landlord of the 45% complete, 665,000 square-foot structure is National Office Partners, a joint venture of the Hines real estate firm and the California Public Employee's Retirement System (CalPERS). The project is the latest addition to CalPERS' $8 billion invested in core real estate properties, roughly $2.2 billion of which is held in California properties.

The transaction, which is unrated but viewed as an NAIC-1, has a 16-year final maturity and a 10.4-year average life. According to market sources, price talk is hovering around 40 basis points over comparable JPMorgan public paper.

According to one buyside source, investors wary of structural, pricing, and NAIC issues - not to mention San Francisco's cantankerous real estate market - are receiving the deal "poorly".

The city's office real estate sector moved from "yellow" to "red" in Moody's Investor Services CMBS: Red-Yellow-Green Update for the second quarter of 2001. The assessment measures the sustainability of cash flows of commercial real estate in the country's top 100 markets on a 0 to 100 point scale. The City by the Bay currently garners a score of 21.

Demand is so light in the area that one developer is reportedly offering a $175,000 BMW Z8 roadster to the broker who signs a tenant to a two-floor lease on a yet-to-be-completed office structure. Separately, Charles Schwab Corp. is shedding 275,000 square feet of downtown space. Moody's expects an 8.4% addition to the stock of available office space over the next year; expected demand floats near 3.2%.

Investors are also concerned over structural issues that limit their recovery in a default scenario - in particular, the lack of availability of a first-lien mortgage, which would allow investors to foreclose on the property should the tenant declare bankruptcy.

"We took a look at the deal but passed specifically because we could not get a lien on the property," said one buyside source.

Pricing was also an issue for several investors. Without an assigned rating on the deal, one buysider sees the transaction's only selling point as the slim possibility of JPMorgan Chase going bankrupt. "Even so," the source reasoned, "why is it that [Lyonnais] thinks its deal is going to price only forty [basis points] behind corporates when we've seen a CTL for Home Depot - a credit just as good as JPMorgan -priced at forty behind [Home Depot's corporates]. Now, if that deal has a first-lien mortgage and [the Lyonnais deal] doesn't, one needs to go tighter and one needs to go wider on relative-to-corporates strength."

Credit Lyonnais did bring a true CTL to market last week for Federal Insurance, a subsidiary of Chubb. The deal is a $25 million transaction involving a New Jersey office building. Viewed as an NAIC-1, the offering has a 17-year final maturity and an 11- to 12-year average life. Buysiders close to the deal are calling the pricing "tight."

Separately, First Union has brought a $115 million sale-leaseback transaction with RVI to market for drugstore chain CVS. The deal involves six warehouses reportedly bought by First Union through a separate equity affiliate, and has a 22- to 25-year final maturity and a 16-year average life. Price talk is heard at 235 basis points over ICUR - tighter, according to one source, than where CVS' store deals are pricing in the secondary market.

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