Rate: 10.25% Interest Only
Term: 24 Month Construction Loan
Transaction Description: GSP arranged ground-up construction financing for a 29-unit for-sale condominium development in the Koreatown sub-market of Los Angeles. The client was a local general contractor who partnered with an owner who contributed the land. The goal was to obtain highly leveraged, non-recourse construction financing and provide no additional equity. The Sponsor tried to access bank financing on their own before coming to GSP.
Challenge: Non-recourse construction financing is very difficult, especially for first time developers. Lenders view ground-up condo construction as one of the most risky types of financing. In addition, the Koreatown market has seen lots of multifamily developments, but there has been little recent condo construction in this market since the last real estate cycle. Also, the insurance and other last minute expenses increased the overall project cost by $500,000.
Solution: Using it relationships, GSP was able to identify a non-recourse construction lender who would provide highly leveraged construction financing. Because the ownership did not want to bring in new capital, it was also critical for the project to be correctly underwritten and achieve certain loan to cost and loan to value targets. When it was discovered that additional insurance would be needed to protect the contractor and the long-term welfare of the project, the lender agreed to increase the loan by $500,000 a few days before closing to provide capital for unexpected costs. This allowed us to close the loan and start construction.
January 30, 2019
George Smith Partners placed the $11,000,000 take-out of a single-tenant office build-to-suit leased for 10 years to an investment grade GSA tenant located in a secondary Southern California market. The tenant, a Children’s and Family Services office had required security upgrades in the building design and construction. Sized to a 1.25 DCR, loan proceeds netted 80% of the total development cost allowing for a partial recapitalization of Sponsor equity beyond the construction loan. The loan was funded less than two weeks post certificate of occupancy issuance but prior to the tenant opening for operations. Fixed for five years at 5.0%, the loan will reset for the second five year term at the CMT+2.25%. There is no pre-payment penalty.
This capital provider traditionally seeks a personal repayment guarantee from at least 51% of the ownership stack. While the 20% GP would sign, none of the limited partners were available to guarantee. Interest rates moved up post application and the Sponsor sought to close as quickly as possible to preserve his applied for coupon. Although the tenant accepted the space and initiated rental payments, they opted to delay their opening date due to the pending holidays. Our permanent loan lender thus questioned if the property was in fact stabilized without an operating tenant. Security cost improvements were amortized into the ten-year lease.
A waiver was requested and granted that accepted a personal guarantee from the manager who holds 20% of the Borrower. Support from the investment grade tenant furthered the argument for this waiver. To mitigate stability concerns, the construction loan and loan finance costs were paid at funding. The return of equity will be distributed once the tenant is “doors open” and commences operations. Our underwriter reviewed the requirement for the security needs and understood the benefit of the guaranteed cash flow from the credit tenant. The capital adviser agreed to raise their LTV constraint from the applied for 67% LTV to 75% LTV. There was no reduction in loan proceeds.
December 12, 2018
George Smith Partners secured $9,300,000 for the ground-up development of a 32-unit multifamily building in the Koreatown neighborhood of Los Angeles. The 5-story project will include a mix of 1 and 2 bedroom units with gated subterranean parking. Sized to 80% of actual costs, the 36-month term carries two – 1-year options and is priced at 2.75% over LIBOR.
Our Sponsor requested maximum loan proceeds which would require the acceptance of imputed equity. George Smith Partners identified a Los Angeles based construction lender that understood the value that had been created with re-entitlements and permitting since the property was initially acquired four years ago. This capital provider agreed to value the land at current 2018 values as opposed to the acquisition price. The bank ordered appraisal valued the land at over 3x the Sponsor’s 2014 purchase price and imputed equity was utilized in calculating the Sponsor’s equity contribution. No additional funds were required at closing.
December 5, 2018
George Smith Partners secured $8,700,000 of non-recourse, bridge acquisition financing for a 45,000 square foot retail center located in Richardson, TX. The Center, which was built in 1985, has a diverse mix of regional tenants and sits on the corner of two of the main thoroughfares in the area.
The Sponsor purchased the Property with the intent to add value through two approaches: (1) increasing rents for tenants that are rolling and paying below-market rates, and (2) constructing an additional 12,000 square feet on undeveloped land within the parcel. There were complications with parcelizing the existing building and the land, which meant that a single lender needed to fund the entire project. The large renovation and construction budget also resulted in only 41% of the total loan being funded at closing.
George Smith Partners identified a lender that could structure the financing to have two holdback reserves, one for the CapEx and TI/LC’s for the existing space and the other dedicated to funding the construction of the new building. The separate reserves allow the Sponsor to pursue both value-add opportunities simultaneously, which drastically reduces the project timeline and maximizes the Sponsor’s IRR. Our capital source was able to get comfortable with the construction component by requiring 75% of the space to be pre-leased prior to funding.
$115,000,000 of Non-Recourse High-Leverage Senior Construction Financing for the Ground Up Development of a 326-Key Four-Star Radisson BLU Hotel in Anaheim, CA
December 5, 2018
George Smith Partners placed a $115,000,000 non-recourse senior construction loan for the ground up development of a 326-key four-star Radisson BLU Hotel in Anaheim, CA. The Property is located in the Disneyland/Anaheim Convention Center submarket less than 1 mile from Disneyland Park. Once completed, the 12 story luxury hotel will be one of the few four star offerings available outside the Park and will feature an innovative, modern design. The amenity rich property will include a rooftop pool and deck with unobstructed views of the famous Disneyland nightly fireworks show and surrounding area. Catering to the Park-going family travelers, bunkbeds will be included in over half the rooms, and the hotel will feature a ground floor pool as well as upscale food and beverage offerings.
The Project will be the first major development east of Interstate 5 in the Disneyland submarket. Additionally, the Hotel is slated to be the 4th Radisson BLU in the United States and will be one of the first four-star offerings available outside of the Disneyland Park.
GSP focused on the submarket’s underlying fundamentals, including 28 million annual visitors, as well as its resilient occupancy rates and average daily rates that stayed relatively consistent through the recession. GSP also demonstrated that the Hotel is likely to capture an outsize share of the submarket’s 4 million annual international visitors. This is due to Radisson’s strong international branding supported by the fact that nearly all 300 Radisson BLUs are located outside the United States. Finally, GSP highlighted the Hotel’s upscale nature, which currently does not exist outside the Park, family friendly design and strong amenity package.
These efforts resulted in a high leverage, non-recourse execution.
Construction Loans California | $3,820,000 Single-Tenant Construction Financing at LIBOR plus 5.00%; 95% LTC
November 21, 2018
George Smith Partners arranged a $3,820,000, 95% LTC construction of an 11,500 square foot NNN DaVita Dialysis center in a tertiary market of California. The Borrower entity was a joint venture between a developer and the land owner.
The Property is located in a tertiary market and also in a predominately residential neighborhood. The Sponsor was unable to contribute cash equity to the Project. Many lenders require 15% of the as-complete value to be in the form of cash equity. Lastly, while the tenant is somewhat well known in the capital markets, the Property is rated as sub-investment grade.
George Smith Partners identified a lender who recognized the strength of the tenant and the lease terms relative to the market. The Lender accepted the as-is value of the land which, after the entitlements were achieved, was significantly more than the limited partner’s cost. The Lender proceeded with the loan without any Sponsor cash equity in the deal, reimbursed the Developer for out of pocket costs to date and gave them additional proceeds as a result of excess value in the land. Because the Lender allowed the land to be contributed at as-is value, the loan amount resulted in a loan to cost ratio of 88%. Given the original cost of the land by the Limited Partner, the actual loan-to-cost ratio was closer to 95%.
November 21, 2018
George Smith Partners placed a ten-year permanent loan for “The Fowler”; a recently constructed 159 unit mixed use multifamily development in Boise, ID. GSP placed the construction loan in Spring 2016 and the Borrower received its final Certificate of Occupancy in March 2018. The Property has become one of the most architecturally significant buildings constructed in downtown Boise. It includes live work units as well as 4,000 square foot of retail.
Our Sponsor obtained +95% physical occupancy in September and was looking to secure a perm loan before year end. Given the rapid lease-up and forecasted rate increases, GSP was commissioned to source the construction loan take-out that would allow for a partial return of equity upon stabilized occupancy but with limited stabilized operating history.
Boise was recently named the fastest growing city in the United States, and the capital markets embraced the Boise MSA’s market dynamics by offering multiple aggressive sizing and pricing structures. Our Sponsor selected an option that allows for a “second bite” for an additional recapitalization once cash flows are further documented and supported by stronger historical operating history. Priced at 153 basis points over the Ten-Year Treasury, the full-term interest only loan allows for future secondary financing.