FINfacts™ XXIV – No. 137 | September 26, 2018

MARKET RATES
Prime Rate 5.00
1 Month LIBOR 2.23
6 Month LIBOR 2.60
5 Yr Swap 3.09
10 Yr Swap 3.14
5 Yr US Treasury 2.97
10 Yr US Treasury 3.08
30 Yr US Treasury 3.18

RECENT TRANSACTIONS
$8,750,000 Non-Recourse Predevelopment Land Loan in Coastal Los Angeles; 14-Day Close

Rate: 6.90% Fixed
Term: 12 Months
Amortization: Interest Only
Loan to Value: 60%
Lender Fee: 1.00%
Prepayment: Open Full Term
Guarantee: Non-Recourse

Transaction Description:

GSP arranged the $8,750,000 ($935/Building SF) non-recourse first mortgage from a REIT to refinance a maturing bridge loan on a 29,500 square foot land parcel located along a major thoroughfare in Coastal Los Angeles. The Borrower recently entitled the land for a retail redevelopment and is now pre-leasing the Project. The loan repaid the existing debt, covered 100% of closing costs, and repatriated equity to the Borrower. The loan provides an additional 12 months of term while the Borrower pre-leases the Project. Although the loan is non-recourse, the Lender did not require an appraisal or other third-party reports, nor did it require an interest or carry reserve although there is no in-place cash flow. Sized to 60% of value, the loan priced at 6.90% fixed for the 12-month loan duration.

Advisors

Gary E. Mozer
Principal/Co-Founder
Katie H. Rodd
Senior Vice President
Michael Anderson-Mitterling
Senior Vice President
Kyle Howerton
Senior Vice President
Akash Rohera
Assistant Vice President

$7,125,000 Cash Out 50-Unit Multifamily Refinance Sized to 1.15 DCR on an Actual Mortgage Constant

Rate: Fixed for 5 years @ 4.515%; floating @ 6 Month LIBOR+2.25%
Term: 30 years
Amortization: 30 years after 2 Years of Interest Only Payments
LTV: 65%
Prepayment Penalty: 3,2,½
DCR: 1.15x

Transaction Description:

George Smith Partners secured $7,125,000 in proceeds for the refinance of a 50-unit multifamily property located in Los Angeles. Fixed at 4.515% for a period of 5 years, the loan self-liquidates at 6 month LIBOR plus 2.25% for the remaining 25 year term; there is no balloon date. Two years of Interest Only payments precede loan amortization. Sized to a 1.15 Debt Coverage Ratio, proceeds were coverage constrained. Prepayment steps down from 3% with no penalty after the third year.

Although the building was previously retrofitted, several capital providers required a new PML earthquake risk assessment study due to the masonry construction. As cap rates continue their compression, cash flows are often the limiting constraint for sizing loan proceeds. Industry standard DCR constraints are limited to 1.20x or 1.25x and often use an inflated rate over the actual indexed note rate.

The selected lender did not require any additional structural reports. Our underwriter allocated credit to our Sponsor for their success in fulfilling their business plan over the past two years; the balance sheet basis was not an underwriting factor. Net cash flow included the Property’s higher rental income as well as previously unreported RUBs income, parking income, and laundry revenue. A quoted competitive spread of 160 basis points over the 5 year swap rate demonstrated the Capital Provider’s belief in this location and sponsorship. Our 1.15 DCR constraint resulted in proceeds above the rest of the market.

Advisors

Shahin Yazdi
Principal/Managing Director
Jonathan Lee
Principal/Managing Director
David Stepanchak
Senior Vice President
Olga Alworth
Senior Vice President
Matthew Kirisits
Vice President
Samuel Sarshar
Assistant Vice President

10 Year Interest Only Loan $6,283,000 Acquisition of Shopping Center outside of Salt Lake City

Rate: 4.85% 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 $6,283,000 in permanent financing for the acquisition of an 83,000 square foot shopping center located outside of Salt Lake City, Utah. The shopping center had unique tenancy that included both national and local tenants, as well as a call center as the anchor tenant. It was crucial for GSP to find a loan with a low interest rate and an interest only component in order to achieve the required return thresholds of the Borrower. GSP ultimately sourced a 10 year non-recourse loan with a fixed rate of 4.85%. The loan is interest only for 10 years.

Challenge:
Numerous lenders where not interested in the Property because of the nature of retail real estate today. Additionally, there had been severe prior environmental issues at the Property as a result of an onsite dry cleaner. Finally, the call center anchor tenant became very problematic for lenders. It was an abnormal use and anchor for a retail property. More importantly, the call center tenant, which made up approximately 33% of the Property’s gross income, could give 6 months notice to terminate their lease and vacate the space at any time. As a result, many lenders could not use the anchor tenant’s cash flow when underwriting the Deal. Because this was an acquisition it was important to close in a timely manner.

Solution:
George Smith Partners leveraged their strong lender relationships to identify several groups who were still active and making competitive loans on retail properties. GSP provided data to the Lender explaining why the call center anchor tenant would not vacate the space. Finally, GSP worked with the Lender and Borrower to add additional structure to the loan, which further mitigated any risk with the call center anchor tenant.

Advisors

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

SPEAKERS CORNER

Evan Kinne was a guest on the Real Estate Investing for Cash Flow Podcast with Kevin Bupp.  The topic of discussion was, “Understanding the Capital Stack and How to Simplify a Seemingly Complex Investment Structure”.  Click here to listen to the podcast or click here to read the transcription.


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HOT MONEY
Permanent Loans Up to 90% of Cost

George Smith Partners is working with a national capital provider funding fixed rate owner-user financing from $1,000,000 to $15,000,000 with spreads between 185-275 bpts priced over the five-year Swap. With the ability to advance 90% of purchase price for asset types including: Office, Industrial, Self-Storage, Healthcare/Skilled Nursing and Hospitality terms are up to ten years. Real Estate operated by third-party management companies; ie. Healthcare/Skilled Nursing, Hospitality, etc. will also qualify for this execution. The lender offers creative financing solutions and will close in under 45 days.

More Hot Money ›

Pascale's Portrait
PASCALE'S PERSPECTIVE
Fed Increases Rates and Signals December Hike Is On Schedule

Today’s rate increase was well telegraphed and expected, the “action” was in the dot plot and commentary as usual. The quarter point increase brought the Fed Funds rate to 2.25%, a level last seen in mid 2008. With all of the recent coverage of the 10 year anniversary of the Lehman bankruptcy and worldwide economic crash, it’s interesting to see today’s increase and commentary as a return to normalcy. For the first time in nearly a decade the Fed statement did not include the term “accommodative” to describe their position on interest rates. The economy finally does not need “accommodation” and is moving towards the all important “neutral rate” (which is estimated to be somewhere around 3.00%). Dot plot: In addition to the December rate hike (which is becoming an annual holiday tradition since 2015), there are three increases set for 2019 and one in 2020. This would put the rate above the neutral rate and into “restrictive territory” for the first time in many years. Interestingly, the Fed sees Median GDP outlook for 2018 now above 3.0% with 2019 at 2.5%, 2020 at 2.0%, and 2021 at 1.8%. This is a classic “soft landing” for a hot economy, this is what Fed policy is supposed to produce. Speaking of the Fed mandate, there was an interesting moment in the press conference where Fed Chair Powell said that their aim is to create an environment “where everyone has a chance to succeed” but he also said there are “limits to what the Fed can do”. This is a sign that normalization is close. The statement included the usual assessment that “risks to the economic outlook appear roughly balanced” (which sounds a lot like the classic refrain at many real estate conferences where the outlook is described as “cautiously optimistic”). 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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