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FINfacts™ XXIV – No. 52 | January 18, 2017
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| Prime Rate |
 3.75 |
| 1 Month LIBOR |
0.77 |
| 6 Month LIBOR |
1.33 |
| 5 Yr Swap |
 1.98 |
| 10 Yr Swap |
2.30 |
| 5 Yr US Treasury |
1.93 |
| 10 Yr US Treasury |
2.42 |
| 30 Yr US Treasury |
3.00 |
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Rate: 4.72% Blended
Term: 1st- 10 Years; 2nd – 10 Years
Amortization: 10 Years
Loan to Orderly Liquidation Value: 74%
Loan to Fair Market Value (FMV): 62%
Recourse
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Transaction Description
George Smith Partners closed a $10,141,000 equipment financing loan with cash-out for a repeat client. After successfully placing two non-recourse loans on two industrial buildings for the client, GSP was engaged to help consolidate several higher interest loans on their equipment and get cash-out for re-investment. Prior attempts by the borrower to refinance the equipment with cash out on their own were not successful.
Challenges
(1) Lenders are dissuaded when it comes to cash-out, especially if the request is significant relative to the collateral value. (2) Under SBA 504c, equipment is required to have a useful life greater than 10 years to qualify. The appraisal indicated approximately 35% of the equipment had a useful life of 8 years. This resulted in almost $4.6M lost in value and would have required the borrower to bring in cash to close versus getting cash-out.
Solution
(1) GSP recognized the “owner-user” attributes of the borrower and how the equipment was used. They identified that the transaction would be eligible for the SBA 504c program which would allow for cash out and carry a lower interest rate. Additionally, GSP worked with an aggressive bank that was comfortable underwriting a loan secured by equipment and not the real estate (2) GSP highlighted to the lender that an experienced in-house maintenance crew was actively servicing the equipment and demonstrated that useful life would be well over 10 which increased the value of the equipment by $4,600,000 and allowed for cash-out. The bank loan and SBA loan carries a blended rate of 4.72%, saving the borrower approximately $1,000,000 in interest costs annually.
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Rate: 7% Fixed
LTV: 72.5% As-Is / 65% As-Complete
Term: 9 Months
Amortization: Interest Only
Recourse
Prepayment Penalty: None
Lender Fee: 1%
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Transaction Description
George Smith Partners arranged a $2,500,000 cash-out refinance loan at a 7% fixed on a free and clear luxury 7,200 square foot single family residence located in Laguna Beach, California. The sponsor recently purchased the property for $3,465,000 all-cash at an auction and sought a cash-out refinance loan to close on another acquisition opportunity, but was sensitive to pricing and terms. GSP identified a specialty lender that could lend aggressively on the asset and close quickly. Sized to 72.5% of purchase price and 65% of as-complete value, the 9-month loan is interest only with no prepayment penalty or yield maintenance. GSP identified a lender that understood the submarket and that the sponsor was experienced enough to rehabilitate the property in a timely fashion to either sell or lease as a rental. GSP underscored the sponsor’s track record and significant remaining equity in the property after the cash-out at closing. This ultimately allowed the lender to get comfortable with the significant cash out and to not require an interest reserve, even though the property has no cash flow. The lender allowed the sponsor to fund an estimated $125,000 in repairs out-of-pocket versus a hold back due to the sponsor’s financial strength and track record of execution. The loan funded in 5 business days with an exceptionally low rate and lender fee for quick close private money execution.
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George Smith Partners sourced a portfolio lender selectively funding three year construction loans up to $40,000,000 to 65% of total capitalization starting at 30 day LIBOR + 325 on a non-recourse basis for experienced developers. They are aggressively funding interest only bridge loans for value add multifamily, retail, office, industrial, and select hospitality properties. Both programs offer two 1-year extension options. Term debt can be originated by the lender up to 75% LTV and 65% LTV on a non-recourse basis to stabilized properties to offer a full service execution once the Sponsor’s business plan is completed.
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Today’s CPI numbers again demonstrate the link between oil prices and interest rates. Annual CPI hit 2.1%, which is just above the Fed’s stated “target” of 2.0%. Note that employment is already at the Fed target. The leading CPI category was gasoline at over 9.0%. Interestingly for real estate, housing costs were up 3.6%. The 10 year Treasury hit 2.43% today after the release, after dropping to 2.40% yesterday morning. Note that the Fed’s preferred inflation measure, PCE (Personal Consumption Expenditure) Index is at 1.4% as of November. But the CPI report definitely indicates an upward trend in prices. Let’s see if it’s sustained. A key component of the unprecedented and ultra-accommodative monetary policy from the Fed in the wake of the financial crisis has been quantitative easing via increasing the balance sheet. The Fed purchased about $80 billion of bonds per month during much of 2010-2013 which comprised of Treasuries and Mortgage Backed Securities. Although the bond buying stopped, the Fed is still holding those bonds and reinvesting the proceeds as they mature. Recent statements by Fed officials indicate that the Fed may be ready to start disinvesting (selling), by not reinvesting as bonds mature. This will lower the Fed’s balance sheet which also dovetails with stated policy goals of the incoming administration. One official indicated the right time would be when short term rates reach 1.0% or at the time of the next 0.25% increase in the Federal Funds Rate which has a potential to happen in June 2017. Again, the Fed is sending out trial balloons to avoid another “taper tantrum” when Bernanke abruptly announced the end of the purchase program and spooked markets. The effect of the increased supply on market and economy will be closely watched. It will be interesting to see when the “old normal” returns, i.e. short term rates near 3.0% and the Fed balance sheet back to its “normal” size of about $1 trillion (down from $4 trillion today). 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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