GSP Insights

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    Non-Recourse Bridge Financing Providing Aggressive Floating Rates

    Hot Money

    July 18, 2018

    George Smith Partners is working with a national bridge lender funding floating rate transactions for all transitional and stabilized property types from $10,000,000 to $100,000,000. Funded up to 85% loan to cost, floating rates start at LIBOR + 300 for terms up to five years. All transactions are non-recourse beyond standard carve-outs.

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    Jonathan Lee Discusses Key Takeaways From PCBC 2018

    Uncategorized

    July 13, 2018

    PCBC 2018 wrapped in San Francisco Friday before the July 4th week. Overall sentiment from homebuilders was bullish, while multi-family operators saw market headwinds and existential threats. Some topic overviews and takeaways included 1) economic and market outlook 2) the components of equity today 3) rent control. On the economic front, developers across the board witnessed price appreciation but slower growth on the wage side, which is starting to cap home prices and limit rents. Prices have reached peak affordability in most major MSA’s. Millennials are starting to buy small condos, to the extent they are available, as a hedge against rising rents. Interestingly land development is outpacing all investments right now, and has become the most desired asset class for several funds. From the equity fund perspective, fundraising in the United States is at an all-time high. Available capital for investment, including non-real estate classes, has exceeded $2 Trillion domestically. What real estate fund managers are receiving money to deploy? Those that have an above average track records and favorable fund terms. Number one concern of those fund managers is valuations and deal flow. More is being returned to LP’s because of record levels of available cash but deal flow remains low. Of the equity groups who are actively deploying LP capital, market perception is mixed. According to a recent Prequin survey, 50% of equity fund managers think real estate is at its peak. The main driver of fear is no longer a global recession, but the rise in interest rates and the US domestic political environment. Return expectations have also fallen. Where expectations were a 20% IRR in 2015, today 17% is becoming the new norm. LP Groups are actively seeking Sponsors who have focus and control over subs. Focus should be on one project or a single thesis. If an opportunity doesn’t fit a particular equity group, don’t ask about second and third deal in your pipeline. Sponsors who do this appear not focused and passionate about success. On the flip side, if a first project is a success then some LP’s are funding zero co-invest with a promote for repeat clients. Because labor is not showing up on jobs and thereby delaying projects, LP equity is looking for local expertise and influence over sub-contractors. Delays from labor not showing up on site push down yields, and Sponsors who can mitigate that risk are placed in a premium level. Lastly, new rent control legislation cast a looming shadow over the conference for developers. The California initiatives to repeal CostaHawkins was viewed as an existential threat to the multi-family real estate industry in California, more than mortgage rates, labor costs and entitlement challenges. If successful it will allow rent caps on property in perpetuity which will cap upside for new developments. It is possible the to be named measure went too far as it also puts single family homes under this new ordinance as well. The Achilles Heel could be forcing Mom and Pop owners of a single family home to cap their upside. On July 2, 2018 the ballot initiative gets a name/number and will be on ballot this Fall. Some final random musings: Driverless vehicles are rapidly changing parking for projects, but driverless trucks could displace 6 million workers by 2024. According to a survey completed by 278,000 renters in 44 states, the most important amenities tenants want in their units are: #1 in-unit washer/dryer, #2 dishwasher, #3 cell phone reception. When is the recession going to hit?!?!?! Happy to report that for the third straight year, the PCBC economist stated a recession isn’t expected for another 36 months.

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    Evidence of Inflation Piles Up, But Treasuries Remain Sub 3.00%

    Pascale’s Perspective

    July 11, 2018

    More and more data indicate an economy at full employment with price increases at all levels of the economy. Producer prices saw their biggest annual increase in over 6 years today as prices climbed 0.3% last month with a 3.4% annual increase. And the NY Fed’s recently “UIG” index (Underlying Inflation Gauge which takes into account non-price data) is at 3.27%. But the 10 year Treasury yield remains stuck at sub 3.00% as markets are fearful of the consequences of tariffs and potential trade wars (less investment by companies and a slowing economy). But what if the economy actually shrugs off the tariffs and they just become another ingredient for inflation? That result may unleash pent up yield spiking. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    Small Balance Construction Financing Prime + 1% to 70% of Cost

    Hot Money

    July 11, 2018

    George Smith Partners is working with a California portfolio lender, focused in urban markets funding construction transactions from $1,000,000 to $7,500,000 on a recourse basis. Rates start at Prime + 1% for terms from 1 year to 30 months. Leverage for Speculative Homes, Condominiums, Apartments, and Small Lot Subdivisions go up to 70% of total development cost.

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    Trade War Talk and Data Combined With Aggressive Fed and Dovish ECB = Flattening Yield Curve

    Pascale’s Perspective

    June 28, 2018

    This week’s continuing and escalating rhetoric about tariffs and potential trade wars has roiled markets.  Also a drop in durable goods orders indicated that the talk has started to affect the economy as businesses are slowing up on ordering things like planes, cars, electrical equipment, etc.  The ECB’s recent announcement that they are very gradually tapering bond purchases is keeping German bond rates very low (with the 10 year at about 0.30%).  US Treasury yields benefit from the “relative value trade” when those bonds are at such low yields.  All of these factors are depressing US Treasury long bond rates, our 10 year is at 2.82% (remember that 40 days ago it was at 3.12% and projected to hit 3.50% by year end).  The depressed long bond combined with the hawkish Fed contributing to higher short term rates has resulted in the flattest yield curve since 2007.  Is this a harbinger of a recession?  Or a confluence of unique metrics that is part of the “new normal-uncharted territory” theme of post crisis world economies. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    Bridge Financing Fixed at 6% or Construction Mezz Fixed at 10%

    Hot Money

    June 28, 2018

    George Smith Partners is working with national lender funding bridge transactions over $10,000,000 and multifamily mezz transactions over $5,000,000 on a non-recourse basis. Bridge rates start at 6% for terms up to three years and mezz rates start at 10% for terms up to five years. Leverage for Multifamily, Anchored Retail, Flex/Industrial, Medical Office and Entitled Land for both programs go up to 85% of purchase price. The bridge program specializes in conversions, rehabs, Note DPOs, Note Purchases, Bridge to HUD, Fannie, Freddie and Bridge to construction loans.

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    Treasury Yields Trading in Tight Range, ECB’s On Schedule “Shadowing” US Fed Moves

    Pascale’s Perspective

    June 20, 2018

    Markets are in the classic conundrum: “on one hand – but, on the other hand -.” As usual it’s a case of whether to focus on today’s good news (US economy at full employment and expected to report 2nd Quarter GDP at an eye popping 4.9%) or what may happen in the future (an all out trade war between US and China). The trade war jitters are feeding a flight to quality treasury rally. The full employment, productivity and GDP numbers combined with a hawkish rate-raising speech by Fed Chair Powell in Europe should have spiked yields well above 3.00%, but the 10 year is sitting at 2.93% after dipping below 2.90% this week. Speaking of Europe, ECB Chair Draghi shed some light on the winding down of ultra accommodative stimulus policy by the ECB. He indicated the ECB will stop its bond buying program this year and won’t start raising rates until summer 2019. This is noteworthy as it signals another “end of an era” of mega stimulus stemming from the Great Recession and subsequent Eurozone crisis of 2010-2012. This is reminiscent of the US Fed, which stopped bond purchases in Oct 2014 and started raising rates in Dec 2015. Note that the ECB started their bond buying in 2015, years after the US Fed had implemented Quantitative Easing. So now, hopefully Europe’s economy can soon stand on its own in a “normal” rate environment and without central banks propping up bond prices and “artificially” compressing spreads. It’s all uncharted territory as the entire era is unprecedented. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    Multifamily and Senior Housing Non-Recourse Bridge Financing Libor + 1.75%

    Hot Money

    June 20, 2018

    George Smith Partners is working with a national balance sheet lender funding bridge/reposition transactions from $5,000,000 on a non-recourse basis. Rates start at Libor + 1.75 % for terms up to 1 year up to 3 years. Leverage for apartments and senior housing up to 75% of purchase price. The lender will fund sub-break-even and to a 125 DCR threshold for lighter construction for better pricing. Fees are generally 100 to 150 bps.

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    Fed Raises Rates as Expected, Accompanying “Hawkish” Statement Does NOT Roil Markets (At Least Not Yet)

    Pascale’s Perspective

    June 13, 2018

    Today’s Rate Increase was expected and “baked in” to markets, all the “action” was in the statement and presser by Fed Chair Powell. Powell’s performance was soothing to markets, which easily could have been “spooked” by the Fed Statement. Highlights from the statement: (1) Although the word “accommodative” remained in the statement (a staple since the crisis), the phrase about keeping rates low “for some time” was dropped for the first time in years, (2) Four rate increases are anticipated for this year (that means two more hikes, most likely in September and December) with three increases in 2019. Note that one more committee member signed on to the four increases this year, (3) Economic growth is described as “rising at a solid rate” instead of “moderate”; “adjustments” are now referred to as “increases” (showing an upward trend in growth and rates is now assumed). The remaining five rate increases in 2018 and 2019 would bring the Fed Funds rate up to 3.25% (up from 2.00% today). That would be slightly above the 2.9% (approx.) assumed neutral rate (the rate which neither stimulates or hampers growth). But today was significant in what didn’t happen: no major market volatility. In recent years, the market would sometimes react to good economic news with “contrarian volatility” as the formula was good news = potential rate increases = “taking away the punchbowl” of central banks propping up economies which is therefore “bad news”. The relatively tepid reaction to today’s positive outlook and rate increase may be showing a more “normal” economy less dependent on central banks. Tomorrow’s highly anticipated ECB comments on their bond buying program will be closely watched and may continue today’s theme of “normalization”.  Prime Rate is now 5.00% and 30 Day LIBOR is 2.05%, both thresholds last seen in 2008. Stay tuned.

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    Non-Recourse Portfolio Permanent & Bridge Lending Programs

    Hot Money

    June 13, 2018

    George Smith Partners identified a national lender funding bridge transactions from $15,000,000 on a non-recourse basis. Floating rates start at 8% for terms up to 5 years for ground-up construction, acquisition, repositioning, recapitalization, partnership restructuring or time sensitivity leveraged to 75% of purchase and 100% of good news dollars. The fixed rate on-book transactions from $3,000,000 offer 30-year amortization and terms up to 10 years on a non-recourse basis. This is truly a portfolio execution and not subject to CLO or CMBS restrictions.

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    Gary Tenzer Explains Why You Should Say Yes To Paying A Defeasance Fee

    In the Press

    June 13, 2018

    With interest rates increasing, some investors are taking a moment to review their loan portfolio to see where they can mitigate the potential impact of higher rates. G.H. Palmer has been fervently combing through his portfolio for nearly a year—and he has seen big benefits in refinancing early and paying a pre-payment penalty to get into a more profitable loan structure. Gary Tenzer, co-founding principal at George Smith Partners, has been guiding the process. The most recent refinance under this model is the $158.8 million in financing for Colony Townhomes, a 752-unit multifamily property located in the Canyon Country community of Santa Clarita, which GlobeSt.com has learned of exclusively.

    Click here to read the exclusive story published in GlobeSt.

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    The Popularity of Life Company Construction to Permanent, Takeout Financing by Antonio Hachem

    In the Press

    June 11, 2018

    “Floating-rate debt offered by banks for ground-up construction was very attractive in the recent past. With the increase to LIBOR, rising interest rates and the fear of unpredictability in the capital markets, however, borrowers are are more attracted to longer term debt construction financing with fixed rates at funding for the entire loan term. Construction to perm financing and takeout financing upon completion of construction – prior to stabilization with life insurance companies is becoming more popular”.

    Click here to read The Popularity of Life Company Construction to Permanent, Takeout Financing by Antonio Hachem.