FINfacts Newsletter XVII-22

Non-Recourse Financing for Credit Tenant Leases Nationwide and Outside the United States.  GSP has identified a capital source providing non-recourse financing of credit tenant leases nationwide and internationally. The lender deals only with investment grade tenants and can provide up to 100% LTV financing if the conditions permit. The terms of the financing vary (contingent on the length of the tenant's lease) but all loans are all fully amortized. The pricing also varies on a deal-by-deal basis and is contingent on the quality of the tenant's credit (only investment grade of BBB- or above considered) and strength of the lease (i.e. length of lease, bondable, NNN, NN, etc). Although an asset's location and sponsorship are taken into consideration, the quality of the credit and strength/length of the lease is imperative.

Hot Money 07/15/2009 - National Lender Actively Lending on Variety of Core and Special-Use Asset Classes.  GSP has identified a capital source actively lending on commercial real estate nationwide. The lender will finance the following asset classes (loan sizes from $1M - $10M): office, industrial, retail, multi-family, self-storage, hospitality, healthcare and other special purpose properties. Additionally, the lender benefits from short and long term fixed rate loan programs with no prepayment penalty, granting borrowers greater flexibility to refinance when financing conditions improve. Par deals and amortization periods of up to 30 years are also available on a deal by deal basis. Pricing ranges in the 6.75 - 7.25% range, with maximum leverage of 65% LTV and origination fees of 0.75% - 1.00%. 

by Gary M. Tenzer, Nathan Auslander, Brian Bergfield and Nick Silbergeld

The recent collapse of the credit markets has left commercial real estate owners and developers scrambling to find capital with which to complete projects and refinance maturing debt. Most face numerous obstacles, including lower asset values, slower sales, lower rental rates, slower leasing, tenant defaults, and the scarcity of financing of all types. Institutions offering equity financing are demanding higher returns and often do not have the capital they claim; furthermore, debt is only available to the worthiest borrowers. Even if one is able to access debt, pricing often is too high to be feasible, or does not provide the leverage necessary to replace existing debt due to lower property values and more conservative underwriting. Coupling low leverage debt with expensive equity leads to an unsupportable total cost of capital. In the “go go years”, Wall Street financed the real estate boom with high leverage at relatively low cost, leading to inflated property values. For many borrowers, this downturn has resulted in foreclosures, deeds in lieu, and bankruptcies.

In the case of a Chapter 11 real estate bankruptcy, the court may permit Debtor-in-Possession (DIP) financing if the sponsor can show it preserves or enhances value, mitigates losses and preserves value, or helps turnaround a struggling property or project. DIP financing frequently enjoys a “priming” or super-senior position to the existing debt and capital stack and is typically junior only to tax liens encumbering the asset(s).

DIP financing can be approved by a motion to the court and without a Plan of Reorganization or as part of a Plan. A court-approved Plan of Reorganization typically may require or be premised on a streamlining of business operations for cost cutting, a reassessment of the DIP’s business plan for viability, an improvement in efficiency, and the restructuring of existing debt, i.e. new amortization, interest rate and maturity date. While the debtor’s Plan of Reorganization may entail a modification of loan terms and an involuntary (or “cram down”) reduction of debt as one solution, another is to infuse fresh money into the project (in part, funded by a DIP loan) in an effort to create future value. The burden falls to the debtor to prove that the proposed Plan of Reorganization, containing the DIP loan and new capital contributions, is feasible and that it facilitates the full repayment of the creditors’ secured claims.

Despite the difficult financing market, George Smith Partners (GSP) is working with investors and lenders interested in providing DIP financing for several reasons: 1) the DIP loan’s super-senior priming priority gives it first rights to cash flow for payment of interest and outstanding principal and to the collateral for ultimate repayment, 2) since the properties are frequently in a transitional stage or under development, the required amount of DIP money is relatively small with respect to total debt, capital and/or orderly liquidation value of the underlying assets, 3) in the event that the borrower defaults on the DIP loan, that the DIP lender has the superior right to foreclose (if not cured by the junior lender) and would then own the property at an extremely low basis compared to valuation, and 4) the DIP lender enjoys a relatively high yield for senior debt.

The majority of DIP lenders require a commitment or origination fee, an annual interest rate in the mid-teens, and often look for an exit fee equivalent to yield the lender a targeted IRR in the 20%+ range. Despite the high cost, the DIP loan remains economical because it constitutes a very small portion of the overall project capitalization.

The current real estate downturn and freeze in the credit markets has left many projects facing bankruptcy. However, developers and owners with properties in bankruptcy may find that DIP financing may be the best means to unlock potential project value. If the debtor can prove plan feasibility, viable projects can be rescued and significant value can be created or preserved.