$12,700,000 Cash-Out Mixed Use Refinance at 3.50% Fixed for Five Years w/ Three Years IO

Rate: 3.50% Fixed for 5 years; 6 Month LIBOR + 2.50% thereafter
Term: 15 years
Amortization: 3 years IO; 30 Years thereafter
Prepayment Penalty: 3,2,1
LTV: 65%
DCR: 1.15
Origination Fees: Par

Transaction Description:
George Smith Partners secured $12,700,000 for the cash out refinance of a stabilized 60-unit historic mixed use property located in Downtown Los Angeles. Fixed for five years at 3.50%, the loan floats at 6 month LIBOR + 2.50% for the remaining 10-year term. There are three years of interest only payments and a 3,2,1 step down prepayment penalty. From the time due diligence was commenced, closing occurred in 40 days with no change to the original terms of the application.

Challenges:
Upon purchasing the property a decade ago, our Sponsors established a bifurcated organizational structure that allowed them to take advantage of a historical tax credit program. Although that benefit was exhausted, the complicated structure remained in place. The subject qualified for an ongoing property tax benefit under the Mills Act but required annual renewal. Most Capital Providers assumed a default rate position using Proposition 13 metrics that stressed the actual net cash flow. The large amount of multifamily units currently under construction in Downtown Los Angeles was also a concern for all underwriters.

Solution:
GSP identified a capital source that was comfortable with the numerous complexities and layers of the ownership structure. NOI was stressed with higher than actual property taxes although our Capital Provider agreed to underwrite down to a 1.15 DCR to allow for additional loan proceeds on their stressed cash flow. Presenting the property as workforce housing and not as the more expensive luxury housing currently coming on-line and under development, offers a competitive advantage over the newer product with higher finishes. The subject’s lower price point allows the property to operate in a separate, less competitive class than newer, more expensive construction.

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