Finfact XXIV- No. 70 | May 31, 2017

MARKET RATES
Prime Rate 4.00
1 Month LIBOR 1.05
6 Month LIBOR 1.41
5 Yr Swap 1.83
10 Yr Swap 2.14
5 Yr US Treasury 1.75
10 Yr US Treasury 2.20
30 Yr US Treasury 2.88

RECENT TRANSACTIONS
$35,000,000: $25,200,000 “Non-Recourse” Credit Facility and $9,800,000 in JV Equity Financing for 97,440 SF Creative Office Conversion with Ground Floor Retail in Downtown Los Angeles

Debt Terms: Confidential

Transaction Description:
George Smith Partners secured $35,000,000 in capital for the conversion of the Norton Building, located in the Fashion District of Downtown Los Angeles. The capital is going to be used to convert the existing mixed-use asset into creative office space with ground floor retail. The $35,000,000 was comprised of a $25,200,000 non-recourse credit facility, which was split into a $12,900,000 term loan fully funded at time of closing and a delayed draw term loan of up to $12,300,000 for tenant improvements and leasing commissions.  Additionally, the capital stack was topped off with $9,800,000 in joint venture equity financing which was also arranged by GSP.

Challenge:
The project was one of the first of its kind in the sub-market and GSP needed to ensure capital providers were comfortable with the demand for creative office tenants within this sub-market of Downtown Los Angeles.

Solution:
George Smith Partners was able to demonstrate the market demand for creative office space via recent leasing trends within the sub-market. Additionally, GSP leveraged off of preliminary negotiations the Sponsor had with potential tenants in order to demonstrate the demand for creative office space at this location.


$14,048,000 Cash-Out Bridge Loan for Six Mid-Construction Luxury Waterfront SFRs in Florida

Rate: 10%
Term: 12 Months + Two 3 Month Extension
Amortization: Interest Only
LTC: 70-75%
Guaranty: Recourse
Prepayment Penalty: None

Transaction Description:
George Smith Partners secured a total of $14,048,000 cash-out bridge financing for six mid-construction luxury waterfront single family residences in Naples, Florida. The sponsor self-funded the developments to date and sought to use the proceeds to finish construction and recapitalize for other projects.

Challenge:
Our sponsor requested maximum loan proceeds in order to pay off an existing bridge loan that was leveraged at an average of 50-60% LTC, finish the construction, and provide cash-out for other similar developments. Many lenders were not comfortable providing a bridge loan to refinance another bridge loan and reluctant to provide cash-out before the projects were complete. In addition, luxury home development was deemed risky due to its vulnerability in a market downturn.

Solution:
GSP identified a private capital source who was comfortable with the incomplete projects and understood the upside potential at completion. Our Sponsor’s considerable development track record and financial strength further encouraged the lender not to shy away from the challenges. Sized to an average of 70-75% of total cost and 45-55% of as-complete value, the 12-month loan is interest only with no prepayment penalty or yield maintenance.


$7,100,000 Multifamily Acquisition Loan; 4.02% Fixed

Rate: 4.02% Fixed for 7 years; 6 Month LIBOR + 2.35% thereafter
Term: 30 years
Amortization: 30 Years thereafter
Prepayment Penalty: 5, 4, 3, 2, 1
LTV: 65%
DCR: 1.15
Origination Fees: Par

Transaction Description:
George Smith Partners secured $7,100,000 for the purchase of a stabilized 58 unit Los Angeles apartment building. Fixed at 4.02% for seven years, the loan self-liquidates and will float at 6 month LIBOR plus 2.35% for the remaining 23 years of the term. Prepayment steps down from 5% and has no prepayment penalty the final two years of the seven year fixed period.

Challenge:
Our subject property had been operated with unusually high expenses. These expenses included an exorbitant security contract and an onsite manager that received an above-market salary in addition to free rent. The seller had also not taken advantage of income opportunities such as utility reimbursements. Underwriters were cash flow constrained, limiting proceeds needed for the acquisition.

Solution:
GSP emphasized the Sponsor’s strong track record of acquiring and improving multifamily properties in this market. In discussions with capital providers, GSP provided supporting comparable data to demonstrate above market operating expenses and specific non-recurring expenses that would not be incurred on a go-forward basis. GSP identified a regional bank that agreed to underwrite to a 1.15 debt coverage ratio based on our Sponsors’ operating budget. The loan closed in 60 days with no change to the original terms.

Advisors

Matthew Kirisits
Director

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HOT MONEY
Creative Financing Solutions to $100,000,000 for Construction and Bridge Loans

GSP is working with a credit company providing high leverage, creative financing solutions for transactions typically unable to be financed by banks.  Loans will be limited to 70% LTV, but can be over 100% of cost for the right transaction.  Pricing starts at Libor plus 10% for terms up to 5 years.  Construction, bridge, and land loans along with other opportunities that require structure will be considered.  Loan sizes range from $10,000,000 to $100,000,000 for transactions in markets with strong fundamentals.

More Hot Money ›

Pascale's Portrait
PASCALE'S PERSPECTIVE
Yield Curve Flattening, Tight Spreads Keep All-In Coupons At Low

The long end of the curve is rallying with the 10 year Treasury hitting its second lowest level of 2017 at 2.198%.    The month of May saw an overall decline of 8.4 basis points.   A couple of factors are in play feeding the “contrarian” long end rally when recent economic reports seem to confirm the Fed’s stated intent to raise rates two more times this year (once “for sure” in mid-June, and then again in September or December.  Note that the second increase is most likely dependent on a “least messy” outcome of this summer’s debt ceiling increase drama in Washington.     An increase in short term rates may slow down the economy and hinder long term growth, especially if there is no major tax reform or infrastructure program enacted by Congress.   Again, all eyes are on Washington.   Long term bonds are dependent on inflation and growth expectations, so the yield curve may continue to flatten as the short end rises along with the Fed rate increases.   CMBS:  Meanwhile spreads are tightening for CMBS loans with the 10 year Swap nearing 2.00%.  All-in rates are again in the low 4’s for full leverage loans.  Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

More Perspectives ›

Principals of George Smith Partners, Gary Tenzer and Gary Mozer,  were recently featured in Connect Media, a national real estate publication.  They offered their insight on the state of the retail market and financing trends in that space.  You can read about it here.


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