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FINfacts™ XXIV – No. 148 | December 19, 2018
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| Prime Rate |
 5.50 |
| 1 Month LIBOR |
 2.47 |
| 6 Month LIBOR |
2.88 |
| 5 Yr Swap |
 2.71
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| 10 Yr Swap |
2.79
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| 5 Yr US Treasury |
2.65 |
| 10 Yr US Treasury |
2.77
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| 30 Yr US Treasury |
3.00
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We Wish You A Happy & Healthy 2019!
Bryan Shaffer, Steve Bram, Gary M. Tenzer, Jonathan Lee, Shahin Yazdi, Gary E. Mozer, Malcolm Davies & The George Smith Partners Family
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Rate: 5.19%
Term: 7 Years
Amortization: 25 Years
Prepayment: 3, 2, 1, 1, 1, 1, 1
Lender Fee: 0.20%
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Transaction Description:
George Smith Partners successfully placed $10,200,000 of acquisition financing ($5,100,000 each) for the purchase of two single-tenant, NNN-lease Albertsons in Albuquerque (52% LTV) and Silver City (65% LTV). The Albuquerque store measures 65,413 square feet, 7.48 acres, and the Silver City store measures 39,385 square feet, 4.81 acres. Albertsons currently has 12+ years remaining on each of the leases. The Sponsor is structured as a TIC and identified these properties in a 1031 exchange.
To mitigate rising interest rate risk, the Lender locked the rate at application, two months prior to closing. The 7-year loans are amortized over 25 years, include step-down prepayment penalties, and have a fixed interest rate of 5.19%.
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Rate: 4.58% Fixed for 10 years
Term: 10 years
Amortization: 30 years
Prepayment Penalty: 5,5,4,4,3,3,2,2,1,1
LTV: 65%
DCR: 1.20x
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Transaction Description:
George Smith Partners secured $5,918,000 in proceeds for the cash-out refinance of a 48-unit multifamily property located in Los Angeles. The return of funds represents a majority recapitalization of Sponsor purchase equity prior to their unit upgrade investment. Fixed at 4.58% for 10 years, the loan will amortize over 30 years. Proceeds were coverage constrained, sized to a 1.20x Debt Coverage Ratio on the actual mortgage constant. The loan provides for a stepdown prepay from 5%.
Challenges:
Since their acquisition, the Sponsor renovated the majority of units. Historical P&Ls demonstrated a recent decrease in collections during months when several units were under renovation. Several capital providers lowered their proceeds projections due to concerns about the cash flow stability. Los Angeles’ compressed capitalization rates consistently limit loan proceeds below 60% of value due to debt coverage constraints. A majority of local and regional lenders utilize a stressed mortgage constant for sizing, limiting proceeds further.
Solutions:
GSP demonstrated that the Property is now stabilized as compared to the immediate market and renovations are substantially complete. GSP identified a lender who underwrote to the in-place rent roll and allocated additional credit for achieving higher income on renovated units. RUBs and proforma laundry revenue collections were utilized in their underwritten net cash flow. Loan proceeds were sized to the actual note rate and were not limited by a stress constant or the Sponsor’s cost basis. Despite a run up in indexes during due diligence, our Capital Provider held the original rate of 4.58% through the 55 day application process.
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Rate: Prime + 0.5%
LTC / LTV: 70% / 65%, including 100% of future funding
Term: 2 Years
Amortization: Interest Only
Prepayment Penalty: None
Recourse: Full Recourse
Lender Fee: 0.5%
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Transaction Description:
George Smith Partners arranged acquisition bridge financing for a value-add multifamily property in the West Adams submarket of Los Angeles. The 10 unit 1970s vintage property was being delivered vacant and with significant deferred maintenance. The Sponsor’s business plan was to optimize the unit mix by reconfiguring the mostly two-bedroom one-bathroom units into a majority two-bedroom two-bath units. This would maximize square footage by enclosing the tuck under parking, which also eliminates the need for a soft story retrofit. Sized to 70% 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% (5.75% today) with no prepayment penalty. Interest is not charged on the holdback until funds are drawn. Although the Lender’s appraisal came in weak and could have resulted in lower loan proceeds, GSP was able to work with the Lender to demonstrate the strength of market sales and rent comps to preserve the loan amount agreed to in the term sheet. The Lender fee was negotiated down to 0.5%.
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George Smith Partners is working with a national portfolio capital provider that is structured with no pre-payment penalty. Loan origination fees of 0.50% for transactions up to $50,000,000 and there are no exit fees. Non-recourse funding up to 60% of cost, rate is set at acceptance of LOI, DSCR requirement of 1.45-1.50x and most loans close within 60 days of pre-screen. Higher leveraged options are available under similar pricing with a personal repayment guarantee. Properties must be in sub-market areas with communities of 100,000+ population.
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The big question today was “Will the Fed Pause It’s Planned Rate Increase in the Wake of Recent Market Volatility?” The answer: “No” And the reaction: More volatility (which markets hope will make the Fed think twice about next year’s planned increases). The Fed today continued its “march to neutral”. The big long term questions are: “What is the neutral rate? Are we there yet?” Remember that Powell spooked markets by saying “We’re a long way from neutral” in early October. Then markets rallied on his late November comment that we are “just below” neutral. That comment and subsequent rally convinced many investors that the December Fed statement could be “one and done”, ie. an increase today and then a pause. Markets were up this morning pre-announcement on that expectation – hope/hype. But Fed Chair Powell tried to thread the needle today. First off, a unanimous decision to increase the rate, which amounted to a “Declaration of Independence” by the Fed in light of recent pressure from the Executive Branch. The Fed’s independence is critical to its standing in the world. Then the “dot plot” of future increases and Powell’s press conference indicated TWO more increases on tap for 2019, contrary to market expectations as the futures markets indicate zero increases for next year. Today, Powell said that we are at the “lower end” of neutral with the increase of the Fed Funds rate to 2.50% (note that 2.50% – 3.50% is the target range for the neutral rate amongst Fed officials). The Fed lowered their growth projections for 2018 to 3.0% (down from 3.1%) and 2019 to 2.3% (down from 2.5%). A seemingly offhand remark put today’s selloff into overdrive: when asked about continuing to trim the Fed’s balance sheet, Powell indicated no pause. Markets were hoping for a “dovish olive branch” in the form of a pledge to pause selling bonds purchased during Quantitative Easing. The 10 year Treasury yield dropped on the “flight to quality”, now at 2.76% (down 50 bps from last month’s high). Stay tuned By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
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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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© 1999 - 2024 George Smith Partners, Inc. DRE # 00822654 FINfacts is an ePublication of George Smith Partners, Inc. For Promotional Purposes Only. All Rights Reserved.
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