FINfacts™ XXIV – No. 6 | February 10, 2016

MARKET RATES
Prime Rate 3.50%
11th Dist COFI 0.66%
1 Month LIBOR 0.43%
3 Month LIBOR 0.62%
6 Month LIBOR 0.86%
5 Yr Swap 1.15%
10 Yr Swap 1.64%
5 Yr US Treasury 1.17%
10 Yr US Treasury 1.69%
30 Yr US Treasury 2.54%
12-Mat 0.35%

RECENT TRANSACTIONS
$32,500,000 Luxury Multifamily Development Financing to 85% of Cost

Rate: 7.42% (blended)
Term: 18 Months + (2) Extension Options
LTC: 85.0%

Transaction Description: George Smith Partners arranged the ground-up construction financing for a 220-unit luxury multifamily project to 85% of the total capitalization. This shovel-ready project is designed to focus on tenant amenities that are superior to those in the competitive set; including a 2,000 square foot salt-water pool, dog parks, 4,500 square foot fitness center/yoga studio, and a 12,000 square foot community center. Onsite and offsite resident events will be incorporated to further distinguish the property from other Class “A” offerings. Tranched as an A and B piece, the loans consist of a $24,900,000 senior loan to 65% of cost along with $7,600,000 of Preferred Equity for an additional 20% of leverage. Both loans are non-recourse beyond a completion guarantee. Senior debt is priced at LIBOR + 4.75% with the Preferred Equity bringing the blended cost of capital to 7.42%.

Challenge: There has not been any new construction of this quality in this market since 2007. The need to verify demand for high-quality, high-amenity residential product at the proforma rents proved challenging. Our Sponsor required a leverage point above what is typically offered by a single financing source.

Solution: Substantial market research was conducted to support the economic and demographic fundamentals for the area. A younger populous with ample disposable income requiring supported amenities was gravitating towards this market. A strong development team along with low market vacancy and accelerated hiring velocity in local employment sectors were major contributors to the narrative.


$4,100,000 Cash-Out Multifamily Refinance w/3 Years Interest Only

Rate: 3.65%
Term: 30 Years
Interest Only: 3 years
Amortization: 30 Years
LTV: 65%
Non-Recourse

Transaction Description: George Smith Partners secured non-recourse financing for a 16-unit apartment building in the Pico-Robertson area of Los Angeles. The Sponsor requested a sub-4.0% rate while seeking to maximize loan proceeds. Despite being sized to 65% of current value, GSP secured a three-year Interest Only period which significantly increased cash flow. Fixed for seven years at 3.65% before floating over the 6 month LIBOR, the loan will self-amortize over the 30 year term. A step-down prepayment penalty from 4% for the first 4 years allows for future flexibility should the Sponsor choose to sell or recapture equity. The full coupon was rate locked two months before closing at no additional cost.

Advisors

Steve Bram
Managing Director & Principal / GSP Co-Founder
Allison Higgins
Senior Vice President

$3,290,000 Single Tenant Special Use Refinance

Rate: 4.0%
Term: 10 Years; Fixed for 5 Years
Amortization: 30 Years
Loan to Value: 75%
DCR: 1.25
Recourse: No

Transaction Description: Our client had purchased the single-tenant medical laboratory/office building in 2006, at the top of the market. Subsequently, the tenant folded operations and vacated during the downturn. Our Sponsor re-leased the subject to a regional medical group for office and laboratory use. Because of the high leverage, special purpose use, non-standard parking and regional credit, proceeds were insufficient to cover the ballooning pay-off. GSP analyzed the tenant’s use of the building, industry growth and credit, to demonstrate that the Medical Group Lab Space used much less parking than a standard office building to solve the parking shortage. Our research also showed that the current use was “mission critical” for this operation and generated income far in excess of the cost of operation. A fixed-to-float loan structure, in conjunction with a base-rent bump will allow for an increase in loan proceeds in five years. Fixed for five years at 4.0%, the non-recourse loan will roll to a LIBOR based floater for the final five years of the term. Sized to 75% of current value, the loan amortizes over 30 years.


$2,000,000 Single-Tenant Industrial Cash-Out Refinance

Rate: 4.0% Fixed
Term: 7 Years
Amortization: 20 Years
LTV: 28%
Recourse

Transaction Description: George Smith Partners successfully placed the $2,000,000 cash-out refinance of a single tenant industrial building in Pasadena, California. Occupied as an owner/user since 1998, our Sponsor was able to recoup $600,000 of his equity in addition to lowering his interest rate. Fixed at 4.0% for 7 years, the loan appraised to 28% of value and is amortized over a 20 year schedule.

Challenge: Our Sponsor had ongoing litigation with the adjacent land owner over the addition of a fence. Lenders were concerned that the pending litigation could challenge title to the parcel and initially would not consider this request until this situation was resolved.

Solution: GSP’s demonstrated that the value of the collateral would not be impacted should our Client not prevail in court. The favorable valuation (28% LTV) and heavy 20 year amortization provided additional comfort in securing new financing prior to this legal situation being resolved. This transaction funded prior to settlement without the requirement for additional collateral or reserves.


Pascale's Portrait
PASCALE'S PERSPECTIVE
10 Year T Yield Drops, Loan Rates Don’t

As Fed Chair Yellen addressed Congress today, the government auctioned $23 Billion in new 10-year bonds and the 10-year Treasury hit 1.69% in trading.  Yellen indicated financial conditions have become less supportive for growth and noted the volatility in foreign economies, specifically China.  Markets are interpreting her comments as “no rate increase at the March meeting” with the next increase now expected in September at the earliest.  Interestingly; she noted that borrowing costs for commercial real estate are among the factors the Fed will evaluate in determining policy.  Yields are dropping on flight to quality.  CMBS/Life Company rates:  CMBS spreads continue to widen as the index falls.  The 10-year AAA bonds for new issues are pricing in the T + 155 range after hitting a high of about T + 165 in recent weeks.  However; B-Piece buyers are demanding more yield, up 200 basis points to 19% in recent months.  B-Piece buyers and a general market “risk off” mood are contributing to tighter underwriting (less cash out, more conservative terms on hotels, etc) constraints.  All-in rates for full leverage 10-year loans are priced 5.00-5.25% for CMBS.  Life Companies originated a high volume of loans in 2015, and have similar allocations for 2016, but as one major originator remarked, “that will be more difficult” and “we are not going down with the Treasury” as loan rates are being floored and/or spreads are widening.  Everything is connected: The troubled energy sector is a big part of the corporate bond market, spreads are widening on their debt and the “contagion” is affecting other non-energy debt.  This in turn widens spreads for Life Company “alternate investments” which widens spreads on real estate loans.  All-in rates (65% LTV) for 10-year life company loans are in the 4.25-4.75% range.   Stay Tuned.   David R. Pascale, Jr.

More Perspectives ›

WWW.GSPARTNERS.COM

Constellation Place
10250 Constellation Blvd., Ste. 2700
Los Angeles, CA 90067
Office 310.557.8336
Fax 310.557.1276
Email finfacts@finfacts.net
© 1999 - 2024 George Smith Partners, Inc. DRE # 00822654 FINfacts is an ePublication of George Smith Partners, Inc. For Promotional Purposes Only. All Rights Reserved.
Hi, just a reminder that you're receiving this email because you have expressed an interest in George Smith Partners. Don't forget to add finfacts@gspartners.com to your address book so we'll be sure to land in your inbox!