FINfacts XXI-27

GSPartners

Volume XXI | No. 27 | July 17, 2013

KEY RATE INDICES
Prime Rate	3.25%	1 Month LIBOR	0.19%	5 Yr US Treasury	1.31%	5 Yr Swaps	1.49%
12-MAT	0.16%	3 Month LIBOR	0.27%	10 Yr US Treasury	2.49%	10 Yr Swaps	2.70%
11th Dist COFI	0.95%	6 Month LIBOR	0.41%	30 Yr US Treasury	3.58%

Transactions of the Week

Transaction Description:

$8,500,000 Cash Out Refinance for a Los Angeles Retail & SRO/Multifamily Bryan Shaffer successfully placed the debt of a retail/SRO property in the heart of Los Angeles. SROs are Single Family Occupants that lack bathrooms and full kitchens inside the unit. This mini-perm replaces the acquisition and rehabilitation loan GSP placed in September of 2011 at a lower cost of capital and provided a partial return of construction costs to the Borrower. The new capitalization allows the Sponsor to complete his lease-up and earn-out additional funds upon hitting occupancy hurtles. Executing a significant turn-around for a depressed area, this project demonstrates how an investment with the proper sponsorship can reshape an entire market. The floating rate loan is prime based with a 5.0% floor, sized to a 1.20 DCR on a 30 year amortization schedule.

Challenge: Very few capital providers understand the value and demand SRO properties. The relatively large loan size inhibited many who do understand the need for this product type. The subject property had just undergone rehab and occupancy levels were still climbing from vacant to the 70% physical at the time of funding, the asset was not stabilized by institutional standards at close. The building has a history of issues and carried a negative stigma with those who are familiar with this operation.

Solution: GSP canvased debt funds, larger local and international banks who understand that this product while unique to suburban America, is not unusual for much larger international cities. Although the Borrower had yet to complete the lease-up, the Lender became comfortable with their business plan of moving away from the more transient tenant to a longer-term leased model. In addition to smoothing out the cash flow, this model helps to dispel the blemish of the prior operator. Due to the Borrowers’ dramatic repositioning, the “before” and “after” rehab convinced the lender to fund prior to occupancy stabilization subject to an actual +1.20 debt coverage at close.

Rate: P+1% w/5% Floor

Term: 5 Years

Amort: 30 Years

LTV: 70%

DCR: 1.20

Recourse

Lender Fee: 0.5%

Advisor: Bryan Shaffer

Transaction Description:

$3,150,00 Non-Recourse Acquisition for a Multifamily Brick Building Shahin Yazdi placed the 70% of purchase debt for a 55 unit multifamily brick building located in the mid-Wilshire district of Los Angeles. The non-recourse loan is fixed for seven years at 4.125% and offers three years of interest only, open to prepayment without penalty after the IO term. The lender did not require an earthquake risk assessment on the brick asset.

Challenge: The subject had come out of the Los Angeles controlled REAP (Rent Escrow Account program) two months prior to going under contract. Most capital providers believe this program leads to deferred maintenance as rents are reduced by half and tenants are incentivized to delay repairs. Although no longer under REAP control, many tenants were paying below contract rent resulting in a high economic vacancy. Historical reporting was inadequately done while the property was in REAP.

Solution: GSP focused on the recently completed capital improvements that were required to exit the REAP control. DCR funding requirements were cut to a 1.20 on actual with a repayment guarantee required until a 1.30 DCR is reached. MAI estimates on operating expenses were used for underwriting and loan sizing purposes.

Rate: 4.125%

Term: 10 Years

Amort: 3 Years IO then 27 Years

LTV: 70%

DCR: 1.30

Prepayment: 3,2,1 open

Non-recourse

Advisor: Shahin Yazdi

Hot Money

National Bridge Lender to $10,000,000 George Smith Partners is currently underwriting several reposition transactions with a capital source new to the national market. The non-recourse loans are priced from 6.5% to 8.0% based on the risk, from $1,000,000 to $10,000,000. Story transactions are welcomed as well as marginal credit history. Core assets are underwritten to a +8% debt yield on the exit. An interest reserve may be funded for loans under a breakeven coverage.

Hot Money

National Bridge Debt from 2.20% GSP identified a national money center bank funding reposition transactions from $15,000,000 to $80,000,000 starting as low as LIBOR + 2.00%. Core assets are considered along with hospitality, student housing and some special use. Non-recourse is available subject to project quality and in-place cash flow. Transactions are sized to 75% of total capitalization. Sub-1.0 DCR is funded with an interest reserve.

If you have an inquiry regarding George Smith Partners' commercial real estate financing, please contact your GSP representative or Todd August, Chief Operating Officer, at (310) 867-2995 or TAugust@GSPartners.com

Pascale's Perspective

Rates “settling in” and “firming up”...... Today’s Fed Chairman testimony took place in Congress but the real “audience” were the markets (as all communications and/or speeches from him are these days). The main message was policy is “fluid and not set in stone”. The 10 year T rallied as low as 2.46% today, closing at 2.49%. CMBS credit spreads have also stabilized. New loans are pricing in the 5.00% range. Is this part of the Fed’s strategy? Low rates were fueling an asset bubble, low cap rates, frothy market....this could be a necessary correction. ...stay tuned... David R. Pascale, Jr.

FINfacts Newsletter XXI-27

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