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FINfacts™ XXIV – No. 106 | February 14, 2018
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| Prime Rate |
 4.50 |
| 1 Month LIBOR |
1.59 |
| 6 Month LIBOR |
 2.06 |
| 5 Yr Swap |
2.74 |
| 10 Yr Swap |
2.92 |
| 5 Yr US Treasury |
2.64 |
| 10 Yr US Treasury |
2.91 |
| 30 Yr US Treasury |
3.11 |
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Rate: 30-Day LIBOR + 3.80%
Term: Three years plus two 12-month extensions
Amortization: 36 months, Interest Only
LTC: 70%
Prepayment: 15-month lockout; open thereafter subject to 0.25% waivable exit fee
Guarantee: Non-recourse
Lender Fee: 1.00%
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GSP arranged the $26,400,000 first mortgage on two 1970’s vintage multifamily assets in Glendale, California. The national balance sheet lender provided a non-recourse loan at 70% of total project cost including 100% of future CapEx funds to complete an extensive interior and exterior renovation. Interest expense is not incurred on CapEx funds until drawn, and sponsor cash flow is maximized as the loan is interest only during the initial three-year term. The 30-Day LIBOR plus 3.80% coupon requires interest rate risk protection. In order to minimize associated sponsor cost the lender structured the interest rate cap with a two-year duration at closing plus an obligation to renew for the third year of the initial term. Due to low going in cash flow, the lender structured an interest reserve to cover debt service during the peak reposition period. The assets are cross-collateralized with the ability to release individual properties subject to debt yield and loan to value hurdles.
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Transaction Description:
George Smith Partners secured a $4,100,000 permanent cash-out refinance for the 7,105 square foot mixed use property in a tertiary Northern California market. The property contains four ground-floor retail spaces and two upper-floor apartment units. Fixed for five years at 4.46%, the 10-year term loan then floats at 6 month LIBOR + 2.75%. This non-recourse execution is amortized over a 30-year schedule.
Challenges:
GSP encountered several challenges when discussing the transaction with capital providers. The Borrowers requested a 5 year fixed rate loan, but 50% of the retail leases roll within the next two years. Due to the commercial use of the space, most lenders required a 25-year amortization schedule, impacting the cash flow after debt service. The majority of regional portfolio capital providers sought a repayment guarantee to maximize proceeds and/or address the rollover risk.
Solutions:
A small TI/LC reserve was set aside to overcome the near-term lease roll. GSP negotiated a DCR constraint of 1.20, lower than the 1.25 requirement traditionally available in the debt market for commercial and mixed use assets. While under application, the lender agreed to increase proceeds due to underwritten NOI documented above original projections.
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Rate: Prime + 0.5%
LTC / LTV: 70% / 65%, including 100% of future funding and interest reserve
Term: 2 Years
Amortization: Interest Only
Recourse: Full Recourse
Prepayment Penalty: None
Lender Fee: 0.5%
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George Smith Partners arranged acquisition bridge financing for a value-add multifamily property in Inglewood, California. The property is located one mile from the City of Champions development site and the revamped Forum. Sized to 70% of total project cost, the loan includes 100% of future funding for property renovation, which includes a full gut renovation of unit interiors and an exterior upgrade. The two-year bridge loan is interest only and floats at Prime plus 0.5% (5.00% today) with no prepayment penalty. Interest is not charged on the holdback until funds, and the loan was structured with an interest reserve to mitigate the property’s weak cash flow during the renovation period. The lender fee was 0.5%.
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WHISPERS FROM 2018 MBA CREF
This week’s annual Mortgage Banker’s Association Commercial Real Estate Finance Convention (MBA CREF) in San Diego was extremely well attended and quite bullish. Nearly all the GSP producers attended, we met formally or informally with several lenders of every strata of the capital stack. The overriding narrative: too much capital chasing not enough deals. It’s a good environment for sponsors with transactions that make sense. First off: Credit spreads are narrowing as indexes rise, keeping all in rates relatively low. Bridge Lenders: Unregulated debt funds are dropping spreads as investor appetite for Collateralized Loan Obligations (securitization vehicles for floating rate debt) is high. Other executions include funds doing portfolio lending using bank lines, mortgage REITs, etc. Virtually all lenders in this field are non-recourse. Negative cash flowing transactions, empty buildings, heavy renovations are all financeable at good leverage and terms. Mezzanine and Preferred Equity: Again, the cost of capital is coming down with healthy competition: sub-debt is available for cash flowing stabilized assets (behind fixed rate CMBS or Life Company), bridge, construction. Pricing can be as low as single digit coupons. Many senior lenders of all types are open to sub-debt with pre-negotiated intercreditor agreements, etc. CMBS: Spreads are tightening as supply is dropping (note that the massive volume of 10 year maturities ended in 2017 as 2008 was a dead year). Low leverage is pricing as low as Swap + 130, today that is 4.22% even with the spike in Treasuries. Full leverage loans are pricing about 160 to 180 over, coupons in the 4.50-4.75% range. Lenders are wary of retail, but many are bullish on the classic “daily needs” local shopping centers. Tenant sales really help, but are not necessary. Life Companies: Large allocations, lower leverage, lock rate at application, all in rates about 4.50%. Banks: Hoping for some deregulation, competing on perms with tight spreads (especially for 5-7 year fixed rate). Still funding construction loans depending on the individual banks portfolio, burn off, reserves, etc. There is some concern about overbuilding in certain markets.Credit Unions: Very active, fixed rate with no prepayment, usually requiring recourse.
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GSP identified an institutional capital provider that is offering additional Borrower optionality on their Bridge and CMBS platforms. On the CMBS front the lender is providing an option to fix the rate at application. The 5, 7 and 10 year terms are priced between 3.75% and 5.00% depending on duration, as well as full term interest only for lower leverage deals. Amortization is either 25 or 30 based on product type and location. The rate lock at application is good for 60 days. On the Bridge platform the same lender is offering 1-2 year term loans priced at L + 250 -450 with open pre-pay on Day 1. The loans are Interest Only and up to 75% leverage. Both programs are focused on retail, office, hotel, multi-family and self-storage.
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If you have an inquiry regarding George Smith Partners’ commercial real estate financing, please contact your GSP representative or Todd August, Chief Operating Officer (310) 867-2995 or TAugust@GSPartners.com
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Constellation Place
10250 Constellation Blvd., Ste. 2700
Los Angeles, CA 90067
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