FINfacts™ XXIV – No. 224 | July 1, 2020

MARKET RATES
Prime Rate 3.25%
1 Month LIBOR 0.16%
6 Month LIBOR 0.38%
5 Yr Swap 0.35%
10 Yr Swap 0.66%
5 Yr US Treasury 0.32%
10 Yr US Treasury 0.68%
30 Yr US Treasury 1.43%

RECENT TRANSACTIONS
$24,300,000 Cash-Out Refinance of a 3-Property Multifamily Portfolio During the COVID Pandemic; Los Angeles, CA

Rate: 3.4% for 5 Years –
Term: 30 years with 3 years Interest Only Period Rate, fixed for first 5 years, resets every 5 years
LTV: 70%
DCR: 1.15
Prepayment: 3,2,1,0
Guaranty: Recourse
12 Month Reserve account that pays first 12 Months

Transaction Description:
George Smith Partners successfully refinanced a 3-Property stabilized multifamily portfolio with cash-out during the COVID stay at home order in Los Angeles.

The new capitalization provided the Sponsor with over $3,000,000 in cash-out to purchase additional properties during a changing market and maintain a strong cash position. GSP was able to obtain of 70% LTV with a starting fixed interest rate of 3.4% for the first 5 years. The loan is for 30 years with indexed changes every 5 years.

Challenge:
As the world entered into a global pandemic, capital providers were unsure about the future of the real estate market in general and specifically the multifamily market. Within two weeks of application over half of the multifamily lenders canceled all their deals and exited the market. Because of this uncertainty, many capital providers pulled back. When the Federal Reserve cuts interest rates they are impacting the index part of the rates, but the risk spread is determined by factors like supply and demand as well as overall risk. Even when the Federal Reserve cuts treasury rates the overall rate to a borrower can increase on assets like commercial real estate. At GSP our role is to manage the entire financing process including managing the expectations of both the Sponsor and Capital Provider. When our clients hear the Federal Reserve is cutting rates, they naturally expect rates to fall However, because of the huge amount of new risk caused by the COVID-19 crisis, rates for commercial real estate actually went up over 1%.

Solution:
GSP opted for a Capital Provider with a slightly higher rate. We had a strong relationship with this Capital Provider and felt that we had a better chance of a successful closing. One week after going into application with our chosen capital provider, the Lender we had passed on pulled out of the market. GSP pushed forward with our client keeping focus on closing the transaction. As treasury rates fell sharply, our capital provider warned us to lock if we wanted to maintain our application rate. Following our advice, the Sponsor locked at 3.4%, our application rate. The following day, rates jumped over 1%, with rates going into the high 4% range. The closing process during COVID is more difficult with Capital Providers wanting to verify every dollar of collection and reduce risk as much as possible. As capital providers started seeing borrowers unable to pay their rent, almost every lender implemented upfront reserves. The overall due diligence process was tougher than we had seen in the past. The loan closed at the agreed rate and proceeds. The Lender required a 12-month interest reserve and we were able to convince the Lender to apply those funds to the first 12 months of the loan payments. This is becoming a common practice for almost all lenders since the COVID Crisis.

Advisors

Bryan Shaffer
Principal/Managing Director
Ruben Bohbot
Vice President
Michael Smilove
Assistant Vice President

SPEAKERS CORNER

Mark your calendar for our next webinar, “Active Lenders in Today’s Market” on Friday, July 10th at 10:00 am PT. The panelists will include: Christine Boyd of Apollo Global Management, Jeff Burns of Walker & Dunlop and Tammy Jones of Basis Investment Group. The discussion will be moderated by Michael Anderson-Mitterling and Olga Brandeis of George Smith Partners.

Register here: https://zoom.us/webinar/register/WN_3DzagYC-SNi2dyXYIYdaIg

If you missed any of our past webinars/podcasts/short videos, below are links to the recordings.


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HOT MONEY
Non-Recourse Bridge Financing Up to 85% LTV

George Smith Partners is placing non-recourse financing for debt sponsors nationwide for multifamily, self-storage and industrial properties. With transactions starting at $20,000,000 for fixed rate bridge w/sub 1.0 cash flow, pricing starts at L+375 with a LIBOR floor of 1.25% (min 5.0% coupon). With terms up to five years with flexible yield maintenance and up to 80% of cost the lender offers IO during the initial term then amortization on a 30-year schedule.

More Hot Money ›

Pascale's Portrait
PASCALE'S PERSPECTIVE
2020 Mid-Year Reflection

As we enter the second half of this unforgettable year, both positive and negative news abounds. Today’s announcement of positive results in trials of a potential vaccine from Pfizer offers hope. Will the “warp speed” process bring the vaccine to the public by year end or in early 2021? Meanwhile, virus infection spikes in highly populated bellwether states such as California, Texas, Arizona and Florida which is very troubling. Businesses that just opened are shutting down again and many workers are being “laid off again”.

The data: June economic reports released yesterday and today (Manufacturing & ADP employment) have been positive but they are trending up from the unprecedented drops from recent months. Tomorrow’s unemployment report is expected to also show positive trending. With the recent spikes and “re-shutdowns”, the trend we have seen for July, the specter of a “W” shaped recovery is looming. The upcoming corporate earnings from a quarter unlike anything we have ever seen in history should be fascinating, “A Tale of Two Cities”.

One of the biggest questions facing the commercial real estate industry is the future of office as an asset class, during and after the pandemic. Recent years have seen a boom in supply and demand as tech, media, and financial services have all embraced the collaborative nature of the office environment. Today, entire industries are working from home and meeting virtually. What’s the future? I noticed an interesting contrast last week as Barry Sternlicht issued a dire prediction for the massive NY office market. He noted that without a vaccine, workers are reluctant to ride trains and buses to the city, not to mention the densely packed sidewalks, lobbies, elevators, etc. He predicts a “tipping point” leading 25% drop in rental income, increased expenses due to new procedures, and a 40% drop in values. Meanwhile, here in Los Angeles, a Canadian developer announced plans to build two of the tallest office towers outside of downtown in the Miracle Mile district. The spec office development will total over 2 million square feet. The combination of hope, fear and uncertainty today brings to mind the opening words of the Dickens’ classic referenced above: “It was the best of times, it was the worst of times”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

More Perspectives ›

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


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