FINfacts™ XXIV – No. 103 | January 24, 2018

MARKET RATES
Prime Rate 4.50
1 Month LIBOR 1.56
6 Month LIBOR 1.93
5 Yr Swap 2.50
10 Yr Swap 2.67
5 Yr US Treasury 2.43
10 Yr US Treasury 2.65
30 Yr US Treasury 2.90

RECENT TRANSACTIONS
$12,122,000 Non-Recourse Permanent Financing for Acquisition and Reposition of a 281-Unit Jacksonville, Florida Apartment

Rate: 4.47%
Term: 12 Years
Amortization: 3 Years of IO, followed by 30-year amortization
LTC: 75% LTC
Prepayment: 11.5 years Yield Maintenance
Guarantee: Non-Recourse

George Smith Partners arranged $12,122,000 of non-recourse, acquisition and renovation financing for a 281-unit multifamily apartment in Jacksonville, Florida. Constructed in 1975, the property consists of 35, two-story, garden-style residential buildings with an average unit size of 728 square feet. Our Sponsor purchased the property to bring rents to market by renovating 211 units and investing in deferred maintenance, common areas, and additional amenities. GSP identified a capital provider comfortable with the Sponsor’s experience, the organizational structure, which included crowd funding and the property management team’s local expertise. During due diligence, it was discovered that the aluminum wiring may have been installed improperly so GSP sourced and worked with a licensed electrician to certify a past electrician’s work. Sized to 75% of purchase, the fixed rate permanent loan was locked at 4.47% for 12 years. The loan will amortize over 30 years after three years of interest only.

Advisors

Steve Bram
Managing Director & Principal / GSP Co-Founder
David R. Pascale, Jr.
Senior Vice President

$6,647,000 Non-Recourse Acquisition Bridge Financing for Self-Storage Facility; 80% of Cost

Rate: 1 Month LIBOR + 4.25%
Term: 36 Months plus two 12-Month Extensions
Amortization: Interest Only During Initial Term & Extensions
LTC: 80%
Prepayment: 12 Month Minimum Interest
Guarantee: Non- Recourse
Lender Fee: 1.00% In / 0.5% Out

George Smith Partners arranged $6,647,000 of non-recourse financing for the acquisition and reposition of a 1,713-unit self-storage facility in the Pacific Southwest. The national balance sheet lender provided a non-recourse loan up to 80% of total project cost that includes funding 100% of future planned expenses (approximately $1,100,000) to upgrade the property’s roofs, parking lots, curb appeal, signage and down units. Interest expense is not incurred on the capital improvement funds until drawn. Borrower cash flow is maximized as the loan is interest only during the initial three-year term. The loan floats at 4.25% over one-month Libor and carries two one-year extension options.


$5,060,000 Permanent 19 Unit Multifamily Acquisition Loan; 5 years Interest Only

Rate: 3.92% fixed for 5 years; floating at 6 month LIBOR + 2.25%
Term: 30 years
Amortization: 30 years
LTC: 65%
Interest Only: 5 years
Prepayment Penalty: 3, 1
Origination Fees: Par
Guarantee: Non-Recourse

Transaction Description:
George Smith Partners secured $5,060,000 of non-recourse acquisition debt for the purchase of a 19-unit multifamily property in Los Angeles. The loan has interest only payments at a fixed rate of 3.92% for the first 5 years, before switching to a 30-year amortization. The lender provided non-recourse execution and a short prepayment penalty structure.

Challenges:
The property is located in a prime Los Angeles location, but low tenant turnover had resulted in one third of the tenants paying less than 50% of market rent. As a result, the property was income constrained. Many lenders stressed their cash flow at a rate higher than their current note rate, resulting in limited proceeds. The seller had upgraded several units and classified the cost as an operating expense on historical P&Ls. The property had a minor deferred maintenance issue that created some uncertainty during the appraisal inspection.

Solution:
GSP identified a Capital Provider that sized their proceeds at the actual note rate, rather than a stressed underwriting rate. The selected lender was also able to underwrite down to a 1.15 DCR, compared to the 1.20 constraint offered by other institutional providers. This resulted in considerably higher proceeds. Invoices were obtained for the unit upgrades which allowed the exact amount of capital expenditures to be deducted from operating expenses. It was confirmed that the deferred maintenance issue was disclosed to potential buyers during the bidding process, thus establishing that the sale price was inclusive of the cost of the repair.

Advisors

Matthew Kirisits
Director

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HOT MONEY
National Non-Recourse Bridge Lender from $2,000,000 to $25,000,000

George Smith Partners identified a national floating-rate balance sheet lender funding bridge transactions starting at $2,000,000 up to $25,000,000 on a non-recourse basis. With the ability to advance up to 80% of total capitalization, pricing starts at LIBOR + 400 for partial or non-cash flowing assets. All core asset classes in primary and secondary markets are underwritten with no minimum DCR or debt yield required at funding.

More Hot Money ›

Pascale's Portrait
PASCALE'S PERSPECTIVE
10 Year Treasury Breaks Through Key Technical, New Fed Chair Confirmed

The 10 year Treasury peaked at 2.63% in March 2017 and back in September 2014, so last week’s spike up to 2.67% is significant. The next level to test is the 2.70 to 3.00% range last reached in Dec 2013 to April 2014. The 2 year Treasury is hitting highs not seen since 2008 (about 2.06%). Is the yield curve flattening? The 2 year T, 3 year T, 5 year T and short term LIBOR all hit near decade highs. The short end of the curve is moving. Yields are being buffeted by news and expectations: Inflation watch-Oil prices are rising and stabilizing above the key $60 per barrel number, US unemployment is dropping as jobless claims hit a record low, the Tax Reform’s repatriation feature is in the news as Apple is bringing a quarter trillion dollars into the US (other companies are expected to follow, pushing GDP and inflation), the ECB is tapering their bond buying, Bank of Canada raised rates and signaled two or three more increases this year. The Wall Street Journal economist survey indicates a 2.74% 10 year T at mid-year and 2.98% at year end. All in loan rates for 10 year full leverage loans should be around 5.00% which may diminish equity returns as sellers typically lag before capitulating on cap rates. The confirmation of a new Fed Chair (Powell) has been overshadowed by shutdown drama in Washington. The short term bill passed this week expires on February 8, that’s when things get interesting. The next funding bill will also need to include a debt ceiling increase (note that a default can wreak havoc in worldwide capital markets, aka, all bets are off at that point). With the contentious and divisive immigration debate seemingly driving the budget process, this could be another “fiscal cliffhanger”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

More Perspectives ›

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