FINfacts™ XXIV – No. 135 | September 12, 2018

MARKET RATES
Prime Rate 5.00
1 Month LIBOR 2.15
6 Month LIBOR 2.56
5 Yr Swap 2.99
10 Yr Swap 3.03
5 Yr US Treasury 2.86
10 Yr US Treasury 2.96
30 Yr US Treasury 3.13

RECENT TRANSACTIONS
Hotel Construction Loan | 53,000,000: Non-Recourse Construction Financing for the Development & Conversion of a 32 Key Boutique Hotel into a 177 Key Marriott Autograph Collection Hotel in Scottsdale, AZ

Rate: 1 Mo. LIBOR + 8.95%
Term: 3+1+1
Amortization: Interest Only
LTC: 64.5% (This included an allowance of imputed equity, which represented a 25% increase in the Sponsor’s basis.
Guarantee: Non-recourse with standard bad-boy carve-outs

Transaction Description:

George Smith Partners secured a $53,000,000 non-recourse construction loan for the expansion of a 32-key boutique lifestyle resort into a 177-Key Marriott Autograph Collection in Scottsdale, Arizona. The construction financing provided the Borrower with sufficient funds to not only expand the Property by adding 145-keys but also to repay the existing lender in full and cover all closing and financing costs.

GSP sourced a lender who understood the intrinsic value of the Property’s strategic location along with the development plans of the expansion. The three year floating rate note, priced at 8.95% + 1 Month LIBOR was sized to 64.5% of project costs. (This included an allowance of imputed equity, which represented a 25% increase in the Sponsor’s basis).

Advisors

Malcolm Davies
Principal/Managing Director
Evan Kinne
Vice President
Zachary Streit
Vice President
Alexander Rossinsky
Assistant Vice President
Rachael Lewis
Assistant Vice President
Aiden Moran
Analyst

10 Year Interest Only $8,500,000 Refinance of Large Class B Office Building in St. Louis

Rate: 5.39% Fixed
Term: 10 Years
Amortization: Full Term Interest Only
Guarantee: Non-Recourse
Prepayment Penalty: Defeasance
LTV: 60%
Lender Fee: None

Transaction Description:

George Smith Partners successfully placed $8,500,000 in permanent financing for the refinance of a 270,000 square foot Class B office building located in the heart of Downtown St. Louis, Missouri. The Building has a unique combination of national and local office tenants, as well as storage and data center space. The Property previously had an expensive floating rate bridge loan and the Borrower engaged GSP to find cheaper long term fixed rate debt. GSP ultimately sourced a 10 year non-recourse loan with a fixed rate of 5.39%. The loan is interest only for 10 years.

Challenge:

Numerous lenders where not interested in the Property because they were not comfortable with the St. Louis office market which has a soft market occupancy. Additionally, while the Building has strong cash flow, it appeared to have a weak occupancy, which caused lenders to view the Property as unstabilized. As a result, many lenders were not comfortable placing long term fixed rate debt on it. Additionally, many of the smaller tenants in the building were on month to month leases, so most lenders would not give credit to that income. Finally, the seemingly volatile historical occupancy of the Property was concerning to lenders.

Solution:

It became evident a large amount of the building’s “vacant” space was actually unusable space. Due to tenant changes over the years, floor space that was previously leasable had become common area space that is now unleasable. As a result, the Property’s occupancy was significantly higher than what it originally appeared. GSP calculated about 20% of the square footage previously counted in the square footage was actually unusable space/common area space. GSP was able to prove to both lenders and appraisers the building was stabilized, it’s cash flow was strong, and its true occupancy was in line with the local market. GSP also demonstrated it was irrelevant to look at any issues with historical occupancy in the Project. Once the current Sponsorship took control of the building, they immediately improved all aspects of the Property. In addition to investing significant capital to improve the Property, they also immediately increased the occupancy, cash flow, and overall quality of the Property.

Advisors

Bryan Shaffer
Principal/Managing Director
Max Lehrman
Vice President
David Danesh
Assistant Vice President

Acquisition Bridge Loan for a 17 Unit Multifamily Property in South Los Angeles, CA; 75% Loan to Cost at a 5.50% Rate

Rate: Prime + 0.5%
Term: 2 Years
Amortization: Interest Only
LTC / LTV: 75% / 65%, including 100% of future funding
Prepayment Penalty: None
Recourse: Full Recourse
Lender Fee: 0.5%

Transaction Description:

George Smith Partners arranged acquisition bridge financing for a value-add multifamily property in south Los Angeles, California. The 17 unit, 1950’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 75% of total project cost, the loan includes 100% of future funding for 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% (5.50% today) with no prepayment penalty. Interest is not charged on the holdback until funds are drawn. Although the Property had sub 1.0x debt coverage (0.7x), an interest reserve was not required. The Lender also only required a recourse obligation from the general partner, who represented only 10% of the equity, even though there were limited partners representing over 25% of the equity. The Lender fee was negotiated down to 0.5%.

Advisors

Zachary Streit
Vice President

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HOT MONEY
Bridge Loans California – Non-Recourse Bridge Financing at 4.99% Pay Rate

George Smith Partners is working with a private bridge lender providing non-recourse short-term pay rate loans secured by first trust deeds on commercial and non-owner-occupied residential real estate in prime California markets. The loan product offers “Pay Rate Protection,” which reduces borrowers’ monthly payment to 4.99% per annum for the entire loan term and defers the remaining interest until loan pay-off without compounding interest. Leverage for Multifamily, Office, Retail, Industrial, Mixed-Use, Covered Land, and Non-Owner Occupied Residential up to 65% of As-Is value for transactions up to $7.5 million with fixed interest rates between 7.99% and 8.99%. Transactions can be completed in seven business days and there are no prepayment penalties.

More Hot Money ›

Pascale's Portrait
PASCALE'S PERSPECTIVE
Thoughts on 10 Years Since The Crash and Great Recession

The Lehman Brothers bankruptcy in September 2008 was the culmination of a chain of events that brought markets worldwide to their knees, prompting governments and central banks to institute unprecedented measures (TARP, Massive Stimulus, Quantitative Easing, Regulation and then Deregulation). The commercial real estate market was devastated: credit froze, property values plunged, tenants failed or renegotiated leases, vacancy spiked, transactions of all types virtually stopped (buying/selling, leasing, refinancing). As many of us recall, the only financing available for years was government (Fannie, Freddie, SBA). But underwriting was very conservative and spreads were wide, private lenders (hard money at big rates for conservative transactions). The main culprit of the crash was excesses in the residential financing market: ridiculously loose underwriting standards allowing unqualified buyers to chase hyper inflated home prices and their mortgages to be packaged, insured and sold as investment grade securities. Commercial lending had its own issues with excess as the typical 2006-2008 CMBS loan structure was 80% LTV (or more), 10 years interest only, sub 100 spreads, and income included some pro-forma aspects (future lease up). Markets slowly responded: 2010 saw the first post-crash CMBS activity (with much more stringent underwriting), regular bank lending came back in 2011, construction lending picked up in 2012-2013.

As of today, all sectors of the Capital Markets are extremely active and liquid. Unregulated debt funds (also known as hedge funds, private equity) are very active in the commercial real estate lending markets. CMBS is back and thankfully underwriting has been restrained compared to pre-crash levels. New regulations involving risk retention and originator reps have winnowed down the number of originators to well capitalized banks and funds. Residential lending standards have tightened, but the general housing market is approaching bubble levels (mostly due to supply/demand imbalances, not pre-crash style over building). The hope is that when the next downturn in prices comes, the increased equity required for borrowers will not lead to a contagion in foreclosures. The “Too Big to Fail” Banks are now bigger and more regulated (but the political appetite for bailouts is gone, so they better not fail). The worldwide central banks (Federal Reserve, ECB, Bank of Japan, Bank of Britain) are trying to bring the world back to the “old normal” after years of stimulus. Massive liquidity has not led to inflation yet. The questions are: where will the next crisis come from and will the financial system be able to survive it without a 2008 style collapse?

“Turmoil on Wall Street and in the credit markets as Lehman Brothers declares bankruptcy, Merrill Lynch has been sold, AIG has been propped up by the US Government”.  To read the full FINfacts “Market Update” from September 17, 2008 click here.  Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

More Perspectives ›

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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