$9,220,000 Non-Recourse Bridge Loan for 51-Unit Multifamily Portfolio Priced at L + 3.25%

Transaction Description: George Smith Partners secured a $9,220,000 non-recourse acquisition bridge loan for a portfolio of 3 multifamily properties totaling 51 units in Los Angeles. Although located in a prime rental market, the majority of units are rented well below market rate, limiting in-place cash flow. Floating at Libor + 3.25%, the interest-only loan was structured as $8,250,000 in initial funding plus $970,000 in holdbacks for capital expenditures.

Challenges: The property has tuck-under parking, which mandates a seismic retrofit. As a result, all potential lenders required earthquake insurance. The common areas of the property are dated and in need of refreshing. Although several lenders were able to size their proceeds to a 1.0x DCR at closing, they required debt coverage milestones to be met, or a cash flow sweep would be triggered. The borrower intends to renovate the majority of units by year 3, but wanted flexibility in case the business plan proceeds slower than anticipated.

Solutions: GSP demonstrated the huge potential upside of the property by providing rent comparables for renovated units in the submarket. This data showed that although the seller had increased income by renovating a small number of units, enormous value-add potential still remains at the property. The lender required earthquake insurance, but considered it a temporary expense and did not count it against cash flow. The requirement for earthquake insurance will be removed when the retrofit is complete. The lender provided future funding reserves of $970,000 that can be drawn down to complete interior and exterior renovations. The lender allowed for 15 months of operation post closing until they will perform a DCR test. Since the borrower’s business plan anticipates considerable improvement in cash flow by month 15, it reduced the likelihood of any cash management trigger. The loan term is 3 years, but also provides for two 1-year extensions in case the borrower needs additional time to complete their business plan.