Transaction Overview
GSP secured $7,100,000 for the purchase of a near-vacant 30-unit multifamily property in Los Angeles. The loan is structured as initial funding of $5,970,000 with additional holdbacks of $1,030,000 in reserves. The 5-year term loan floats at Prime + 0.25% with a floor of 4.75% and has two years of interest only payments before amortizing over 30 years. The purchaser is planning an 18-month renovation of the property that includes the addition of eight new units.
Challenges: At the time the purchase and sale agreement was signed, the property had only two units rented. Although the sponsor had extensive experience with ground-up construction of warehouse space, they had only completed one renovation of a multifamily property. The sponsor’s proforma rents were at a premium to unrenovated units in the submarket, causing some lenders to stress their underwritten rents. The property was also mistakenly flagged under the LA Soft Story Retrofit ordinance even though the City had already issued a Certificate of Compliance.
Solution: GSP was able to source a lender comfortable with the limited cash flow during the renovation period by emphasizing the strength of the submarket and the enormous value-add potential of the property. Rental comps for newly renovated units in the area were provided along with the borrower’s very large per-unit renovation budget. This data showed that the borrower’s rent projections are well supported by the market. A detailed budget and architectural plans were effective at securing comfort with the borrower’s capability to meet the business plan. GSP contacted the City and secured the Certificate of Compliance, which led to the removal from the Soft Story list. The acquisition loan closed in 40 days from application.
