FINfacts Newsletter XXI-14

Volume XXI  |  No. 14  |  April 9, 2014   Letter to the Editor KEY RATE INDICES Prime Rate  3.25% 1 Month LIBOR  0.15% 5 Yr US Treasury  1.62% 5 Yr Swaps  1.71% 12-MAT  0.12% 3 Month LIBOR  0.23% 10 Yr US Treasury  2.69% 10 Yr Swaps  2.80% 11th Dist COFI  0.71% 6 Month LIBOR  0.33% 30 Yr US Treasury  3.57%     Transactions of the Week Transaction Description: $8,000,000 Assisted-Living Acquisition & Reposition Loan Shahin Yazdi successfully placed the 65% loan to cost for the acquisition and reposition of an un-stabilized assisted living facility. With occupancy at 70%, this West Coast asset operated below break-even coverage, requiring an interest reserve to cover the debt service short. The loan has a 10 Year term and is fixed for the first two years at 6.25% before floating at 2.25% over Prime. The Borrower may elect to choose a fixed option of the 5 year CMT + 4.25% in place of the Prime floater after the second year. Challenge: Physical occupancy was 70% at application with a 68% economic T-12 (trailing-12 month cash flow). Net income covered operating costs but was significantly below break-even at close. The Borrower required a limited recourse guarantee with a burn-down upon stabilization. Solution: Borrower experience with assisted living facilities was highlighted with a business plan from a sponsor who has repositioned similar products in the past. Market occupancy was considerably higher than historical operations. An interest reserve was structured to obtain a 1.0 dcr until stabilization. Market occupancy and Sponsor experienced gave comfort to the credit officer, allowing for a limited repayment guarantee (top 50%) to burn-down as various cash flow hurtles are obtained on a T-6 basis. Rate: 6.25% Term: 10 Years Amort: 2 Years IO then 23 Years LTC: 65% Prepayment: 3,3,3,2,1 open Recourse: Limited to top 50% burning off at stabilization.  Advisor: Shahin Yazdi Transaction Description: $1,620,000 Acquisition Financing for a Single-Tenant Auto Related Property George Smith Partners successfully placed the 65% loan to purchase (67% loan to value due to a low appraisal) acquisition financing of a Pep-Boys auto repair store in New York State. The borrower acquired the property as the replacement property in a 1031 tax deferred exchange. The 20 year amortized term is fixed for 5 years at 5.0% prior to being recast for the second 5 year term at then prevailing rates. A step-down prepayment was structured to provide for future flexibility. Challenge: With only 9 years remaining on the initial lease term, institutional lenders are leery of event risk on single tenant properties. The auto-bays added a specialty-use component to the collateral should the tenant not renew one year prior to the loan termination date. An environmental concern was also raised by a number of portfolio lenders polled. All borrower contingencies were removed to secure control of the property in what was a very competitive bid process. Certainty of close as applied for and timely execution was paramount to avoid severe tax consequences. The appraisal came in less than the purchase price, thus jeopardizing loan proceeds. Solution: Mr. Stein quickly identified a local lender officed minutes from the property who immediately inspected and reviewed the property information. Their “in the market knowledge” gave a comfort that this location would quickly release to an identical user should Pep Boys vacate. A clean Phase I report mitigated all environmental concerns. A full credit committee commitment was issued within 24 hours of loan submission conditioned only upon 3rd party reports. Despite the low valuation, GSP worked with the lender to quantify lender risks for this cash-in execution and established a comfort level to extend their LTV constraint by an additional 2 percentage points. Rate: 5.0% Fixed for 5 Years Term: 10 Years Amort: 20 Years LTV: 67% LTC: 65% Prepayment: 5,4,3,2,1 open Recourse Advisors:  Stephen Stein, Teddy Stutz Transaction Description: 100% of Cost Cash-Out Refinance of SoCal Multi-Family Property Shahin Yazdi successfully placed the 75% loan to value refinance of an East Los Angeles apartment building. Our borrower purchased the asset less than 18 months ago and after cosmetic upgrades, increased rents and stabilized collections. GSP identified a capital provider that agreed to base the loan on today’s value rather than the cost basis from 18 months prior. There was a total return of cash equity to the Sponsor of his initial down payment and all capital expenses. The 10 year term offers a fixed rate for 5 years at 3.95% before floating at 2.25% over the 6 month LIBOR. Rate: 3.95% Fixed for 5 Years; L+2.25% Term: 10 Years Amort: 30 Years LTV: 75% Recourse Advisor:  Shahin Yazdi Hot Money Central California Bank George Smith Partners is working with a regional bank focused on 65% LTC construction, bridge/reposition and 75% LTV mini-perm loans from Sacramento to Fresno. $1,000,000 to $15,000,000 commercial transactions are being executed on a diverse product mix including core assets, hospitality, assisted living and agriculture/vineyards. Hospitality construction debt is funded with a five-year mini-perm at CofO. LIBOR spreads run from 275 to 350 and are full or partial recourse over 50% of value/cost. 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 NNN Property Financing – Part 1 of 2 Single-tenant triple net properties (NNN), or more commonly referred to as STNL (for single-tenant net leased), are one of the most highly sought after real estate investment property types in today’s market.  Ownership of an STNL property is ideal for investors looking for real estate investment income without the hassle of property management as the tenant is usually responsible for all expenses of the property including property taxes and insurance.   Like any real estate investment there are cautions to these opportunities and the definition of triple net can take on different meanings depending on geographic custom.  While location is always a consideration, the devil is in the details of the lease, financial strength of the tenant, and more importantly the guarantor of the lease or lack thereof.  A STNL lease with near term expiration will cause lenders to look at the property’s “dark value,” and the lender may require a shorter amortization schedule, reserves for tenant improvements and leasing commissions, or both.  All of these potential issues can be mitigated if properly researched and convincingly presented.  Ample institutional capital is currently available for net-leased assets as will be covered in next week’s FINfacts.  Stephen Stein Pascale's Perspective “Dovish” Fed Minutes Release Calms Markets……  With tapering proceeding on schedule, the focus recently has been on when the Fed will raise the Fed Funds rate, i.e. the end of “ultra accommodative” Fed rate policy that started in late 2008.  At that time the Fed lowered the rate to near zero and 30 day LIBOR has remained in the 0.2% range since then.  Today’s minutes showed unanimous agreement among the governors to end the “quantitative” policy, i.e. pegging the next rate increase to 6.5% unemployment and/or 2.0% inflation.  The Fed is now embarking on a “qualitative” approach which basically means “We will know it when we see it”.  They will raise rates when the economic recovery is strong enough.  A set date has not been named; calming markets that were rattled when Chairperson Yellen suggested that rates may rise in April 2015 during her last press conference.  Historical perspective: The Fed Funds rate was once the chief tool of the Fed, it was adjusted 41 times between Jan 1, 2000 and December 2008.  It has not moved in the last 5½ years.  It’s another case of “taking off the training wheels” without shocking the recovery.   …Stay Tuned….   David R. Pascale, Jr ©2014 George Smith Partners, Inc. DRE # 00822654 FINfacts is an ePublication of George Smith Partners, Inc. For Promotional Purposes Only. All Rights Reserved.