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FINfacts™ XXIV – No. 25 | June 22, 2016
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| Prime Rate |
 3.50 |
| 1 Month LIBOR |
 .45 |
| 6 Month LIBOR |
.93 |
| 5 Yr Swap |
1.19 |
| 10 Yr Swap |
1.57 |
| 5 Yr US Treasury |
1.21 |
| 10 Yr US Treasury |
1.69 |
| 30 Yr US Treasury |
2.5 |
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Rate: LIBOR+350
Term: Three Years plus Two 1 Year Options
Non-Recourse
LTC: 65%
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Transaction Description: George Smith Partners placed the ground-up development of a 292 unit multifamily rental property located in a secondary mid-west market. Although a completion guarantee was provided from a deep-pocket Borrower, a repayment guarantee was not available to sign on the loan. Despite a lack of clarity for several Dodd-Frank provisions, our capital provider committed to funding up to 65% of actual costs based on their interpretation of the HVCRE constraints. Our well-heeled Sponsor has extensive experience in this market with this rental product and mitigated all concerns over its secondary location. Floating at 350 over LIBOR, the three-year non-recourse loan has two options to extend.
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Rate: PRIME + 1.00% w/4.75% Floor
Term: 7 Year Term: 2 Year Construction Period with 5-Year Mini Perm
Prepayment: Open Prepayment
LTC: 65.0%
Recourse: Top 25% w/Burn-Down to Non-Recourse
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Transaction Description: George Smith Partners successfully structured and placed the ground-up construction financing for a Class-A, 24-unit market rate apartment complex adjacent to a prestigious Southern California University. Designed to fulfill demand for non-student, Class-A residential product, the development is a loft-style design consisting entirely of 2 bedroom/2 bathroom units. The 65% of cost loan is priced at PRIME + 1.00% with the seven year term structured as a two year construction period converting to a five year mini-perm fixed at 4.75%. Pre-payable at any time, this loan provides full flexibility to the Sponsor while protecting against maturity default. Top 25% initial recourse becomes non-recourse upon achieving a minimum debt service coverage ratio.
Challenge: Although the surrounding residential market is extremely strong, the majority of adjacent product is student housing with a very limited amount of comparable market rate product. There is negligible sales velocity to provide new product comparables and the lender/appraiser was required to look outside the immediate market area to support values.
Solution: George Smith Partners identified a lender active in the greater market area and comfortable with the location and underwritten assumptions. Significant market research was conducted to support demand for market rate apartments and achievable market rents. The demographic study and asset design ultimately supported initial underwritten assumptions. The Sponsor’s market and product experience provided our capital provider with additional comfort.
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George Smith Partners Founding Principal Steve Bram met with senior decision makers of a National Life Insurance Capital Provider last week seeking to take advantage of Dodd/Frank regulations and expand their concentration of CRE debt. Priced closer to Wall Street than competitive LifeCo executions, this stabilized portfolio advisor will fund transactions to 75% of actual market value on a 5, 7, 10 or 15 year term. Floor cap rates and debt yields are not part of their sizing equation. Spreads over corresponding Treasuries (not the greater of SWAPs) range from 200 to 300 over. Requests on core assets, hospitality and self-storage are considered from $8,000,000 to $120,000,000. Moving pieces including potential tenant roll, that traditionally precludes balance sheet lenders from quoting, are underwritten to the market and sponsorship experience.
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Last week’s no-action Fed meeting and subsequent comments from the Chair regarding international events highlighted the markets focus on Thursday’s “Brexit” vote. Treasury yields dropped to 4 year lows last week (flight to quality) as predictions leaned towards a “yes” vote for Britain to leave the EU. Over the weekend, expectations turned towards a no vote. Equity markets rallied on Monday and Treasury yields jumped up to 1.68%, the highest since June 9. Central banks worldwide seem to be in a wait and see mode, watching the vote and subsequent market reaction. If the vote is no, watch for the Fed to go back to “data watching” mode: whereby a no vote and a strong employment report release in early July may lead to a July rate increase (unexpected but possible). There is a feeling that today’s ultra-low Treasury rates are “out of synch” with US economic fundamentals and that yields are being “pulled down” by negative rates in Germany, Japan, etc and general global growth concerns. stay tuned
David R. Pascale, Jr.
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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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