$24,300,000 Cash-Out Refinance of a 3-Property Multifamily Portfolio During the COVID Pandemic; Los Angeles, CA

Rate: 3.4% for 5 Years –
Term: 30 years with 3 years Interest Only Period Rate, fixed for first 5 years, resets every 5 years
LTV: 70%
DCR: 1.15
Prepayment: 3,2,1,0
Guaranty: Recourse
12 Month Reserve account that pays first 12 Months

Transaction Description:
George Smith Partners successfully refinanced a 3-Property stabilized multifamily portfolio with cash-out during the COVID stay at home order in Los Angeles.

The new capitalization provided the Sponsor with over $3,000,000 in cash-out to purchase additional properties during a changing market and maintain a strong cash position. GSP was able to obtain of 70% LTV with a starting fixed interest rate of 3.4% for the first 5 years. The loan is for 30 years with indexed changes every 5 years.

Challenge:
As the world entered into a global pandemic, capital providers were unsure about the future of the real estate market in general and specifically the multifamily market. Within two weeks of application over half of the multifamily lenders canceled all their deals and exited the market. Because of this uncertainty, many capital providers pulled back. When the Federal Reserve cuts interest rates they are impacting the index part of the rates, but the risk spread is determined by factors like supply and demand as well as overall risk. Even when the Federal Reserve cuts treasury rates the overall rate to a borrower can increase on assets like commercial real estate. At GSP our role is to manage the entire financing process including managing the expectations of both the Sponsor and Capital Provider. When our clients hear the Federal Reserve is cutting rates, they naturally expect rates to fall However, because of the huge amount of new risk caused by the COVID-19 crisis, rates for commercial real estate actually went up over 1%.

Solution:
GSP opted for a Capital Provider with a slightly higher rate. We had a strong relationship with this Capital Provider and felt that we had a better chance of a successful closing. One week after going into application with our chosen capital provider, the Lender we had passed on pulled out of the market. GSP pushed forward with our client keeping focus on closing the transaction. As treasury rates fell sharply, our capital provider warned us to lock if we wanted to maintain our application rate. Following our advice, the Sponsor locked at 3.4%, our application rate. The following day, rates jumped over 1%, with rates going into the high 4% range. The closing process during COVID is more difficult with Capital Providers wanting to verify every dollar of collection and reduce risk as much as possible. As capital providers started seeing borrowers unable to pay their rent, almost every lender implemented upfront reserves. The overall due diligence process was tougher than we had seen in the past. The loan closed at the agreed rate and proceeds. The Lender required a 12-month interest reserve and we were able to convince the Lender to apply those funds to the first 12 months of the loan payments. This is becoming a common practice for almost all lenders since the COVID Crisis.

Advisors

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