Rate: One-Month LIBOR + 2.35%
Term: Five Years
Amortization: Four Years I/O; 35-Year Amortization Thereafter
LTV: 68.5%
Guarantee: Non-Recourse
Lender Fee: 1.00%
Prepayment: 18-Months Spread Maintenance

George Smith Partners secured a $124,250,000 permanent loan to refinance out an existing construction loan on a 560,000 square foot, class-A, mixed-use office and retail property in a Midwest market. The non-recourse loan provided the borrower significant cash out at close in addition to funding 100% of future tenant improvement and leasing commission costs associated with stabilizing the property. It also repaid the existing construction loan and covered closing costs. The existing property is 93% leased, but only 80% occupied, to a mix of credit and non-credit tenants including a boutique cinema. The five-year, floating-rate loan priced at 2.35% over One-Month LIBOR and offered four years of interest only payments with 35-year amortization during the fifth year of the loan term. Other benefits of this loan structure include:
• flexible prepayment
• five-year initial term vs. typical 3+1+1 loan term structures that would have required specific performance hurdles and extension fees
• no forced funding date for the future funding component
• no syndication risk as the portfolio lender (a bank) is holding the entire loan on balance sheet
• generous interest rate hedging requirement of purchasing LIBOR caps for two-year terms to reduce hedging costs

Rate: Floating at L + 3.25%
Term: 3+1+1
Amortization: Interest Only
Prepayment: Yield maintenance for 18 months then open
LTC: 67%
DCR: 0.98x at close
Guarantee: Non-Recourse

Transaction Description:
George Smith Partners secured a $9,220,000 non-recourse acquisition bridge loan for a portfolio of 3 multifamily properties totaling 51 units in Los Angeles. Although located in a prime rental market, the majority of units are rented well below market rate, limiting in-place cash flow. Floating at Libor + 3.25%, the interest-only loan was structured as $8,250,000 in initial funding plus $970,000 in holdbacks for capital expenditures.

Challenges:
The property has tuck-under parking, which mandates a seismic retrofit. As a result, all potential lenders required earthquake insurance. The common areas of the property are dated and in need of refreshing. Although several lenders were able to size their proceeds to a 1.0x DCR at closing, they required debt coverage milestones to be met, or a cash flow sweep would be triggered. The borrower intends to renovate the majority of units by year 3, but wanted flexibility in case the business plan proceeds slower than anticipated.

Solutions:
GSP demonstrated the huge potential upside of the property by providing rent comparables for renovated units in the submarket. This data showed that although the seller had increased income by renovating a small number of units, enormous value-add potential still remains at the property. The lender required earthquake insurance, but considered it a temporary expense and did not count it against cash flow. The requirement for earthquake insurance will be removed when the retrofit is complete. The lender provided future funding reserves of $970,000 that can be drawn down to complete interior and exterior renovations. The lender allowed for 15 months of operation post closing until they will perform a DCR test. Since the borrower’s business plan anticipates considerable improvement in cash flow by month 15, it reduced the likelihood of any cash management trigger. The loan term is 3 years, but also provides for two 1-year extensions in case the borrower needs additional time to complete their business plan.

Advisors

Matthew Kirisits Director

Rate: Prime + 0.5%
LTC / LTV: 70% / 65%, including 100% of future funding and interest reserve
Term: 2 Years
Amortization: Interest Only
Prepayment Penalty: None
Recourse: Full Recourse
Lender Fee: 0.5%

George Smith Partners arranged acquisition bridge financing for a value-add multifamily property in the Mid-City neighborhood of Los Angeles, California, a gentrifying urban submarket. The 9 unit, 1960’s vintage property had significant deferred maintenance and below market rents. The Sponsor’s business plan was to reposition the property and release the units at market rents. 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 are drawn, 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 negotiated down to 0.5%.