California

George Smith Partners successfully secured the 70% of cost acquisition of a 39,000 square foot on-campus medical office building in Gardena, California. Initially master leased to the adjacent hospital, the master lease expired a year prior to this acquisition. Allowing for the first year of interest only, the bridge to perm loan is fixed for five years at 4.25% and will amortize over 25 years for the balance of the term. This loan was sized to a 1.20 debt coverage ratio on the interest only debt service payment against the actual cash flow at the time of funding. Prepayment steps-down from 4% and is open without prepayment for the final year. This structure includes a one-time future earn-out of $627,000 should the subject obtain 90% occupancy within the first year. Challenges: Most of the tenants were on month-to-month or had no lease in place; seller historical operating history was incomplete. Physical occupancy was only 79% at application and those tenants with leases presented significant turnover during the first few years of the loan. Minimal in-place cash flow at funding challenged loan proceeds. Our Sponsor did not have any experience owning or operating medical office real estate. Solutions: Estoppels were secured for underwriting to back-fill incomplete P&L statements. Two lease extensions were negotiated and executed with current tenants to minimize the rollover exposure. By sourcing a capital provider whose DCR requirement was based on interest only payments, we were able to maximize loan dollars while meeting their underwriting guidelines in spite of the property’s low, in-place NOI. Market strength and hospital campus location supplemented the Borrowers’ financial strength. A 3rd party property management company was engaged for day-to-day operations.