FINfacts™ XXIV – No. 138 | October 3, 2018

Prime Rate 5.25
1 Month LIBOR 2.27
6 Month LIBOR 2.60
5 Yr Swap 3.14
10 Yr Swap 3.21
5 Yr US Treasury 3.03
10 Yr US Treasury 3.16
30 Yr US Treasury 3.20

$25,000,000 Construction Mezzanine Financing for Speculative Office in Tempe, Arizona


Transaction Description:
George Smith Partners arranged $25,000,000 of Mezzanine construction financing and supported the sponsor in negotiating the $80,500,000 senior financing for a speculative, mixed-use, office and retail project located on North Scottsdale Boulevard and Tempe Town Lake in Tempe, Arizona. This phase of the development includes 250,000 square feet of a 15 story, Class A, high rise office space and 44,000 square feet of lifestyle retail space.

Given the perceived historical volatility of the Phoenix and Tempe office markets, and the speculative nature of the business plan, many potential investors were unwilling to take on the risk. Preleasing was critical to the advancement of the Project and to the capital markets. The Senior Lender mitigated the uncertainty by requiring a minimum leasing threshold to be achieved prior to advancing any loan proceeds. However, the local leasing market would not commit to new leases without a committed delivery date.

The Sponsor, with George Smith Partners’ assistance, was able to develop an alternate structure to the Senior Loan. This allowed the Sponsor to fully engage the equity solution and provide a certain completion date to the Lenders and the tenant market.


Scott Meredith
Managing Director & Principal

$10,810,000 Acquisition and Reposition Financing on a Student Housing Property Adjacent a Major Southern California University; 4% Debt Yield at Closing

Rate: 30-Day LIBOR + 3.90%
Term: Three years plus two 12-month extensions
Amortization: 36 months interest only
Max Loan to Cost: 75%
Prepayment: 18-month minimum interest period
Guarantee: Non-recourse
Lender Fee: 1.00%

Transaction Description:

GSP arranged the $10,810,000 first mortgage on a 1960’s vintage, 96-bed student housing property in Los Angeles. The national balance sheet lender provided a non-recourse loan at 75% of total project cost including 100% of future CapEx funds totaling $59,000 per unit to complete an extensive interior and exterior renovation. Interest expense is not incurred on CapEx funds until drawn, and Sponsor cash flow is maximized as the loan is interest only during the initial three-year term. The 30-Day LIBOR plus 3.90% coupon requires interest rate risk protection and in order to minimize associated Sponsor cost the Lender structured the interest rate cap with a two year duration at closing plus an obligation to renew for the third year of the initial term. Due to low going in cash flow (4% debt yield), the Lender structured an interest reserve to cover debt service during the peak reposition period.

Cash Out Office Building Refinance Sized to a 30-year Amortization in North Hollywood, CA

Rate: 4.96%
Term: 5 Years Fixed, 30 Year Term
Amortization: 30 Years
Recourse: Full Recourse
Prepayment Penalty: 4,3,2,1
Lender Fee: None

Transaction Description:
George Smith Partners arranged perm financing for the refinance of a 14-unit office building in North Hollywood, California. The Sponsor was operating his business in the largest unit on the ground floor and was looking for maximum cash out while locking in a new fixed rate before the Fed increased rates. GSP worked closely with a lender who would utilize market rent on the owner user portion in order to increase the debt service coverage ratio and maximize loan proceeds. Despite the fact that the Sponsor didn’t have a lease on himself, GSP and the Lender worked hand in hand to ensure that market rent would be factored into the Lender’s underwriting on the Subject Property.

Most lenders would not utilize market rent for the owner used portion and wanted to internally underwrite the loan to 13 units. This would cut loan proceeds by $320,000 because the owner’s unit made up 18% of the Property’s income. Additionally, the appraisal came back with a remaining economic life of 20-years. As a result, the Lender adjusted their amortization to 20-years matching the remaining economic life of the Subject Property.

George Smith Partners worked closely with the Lender to guarantee they used market rent in their underwriting to ensure the cash out proceeds would be met. When the remaining economic life came back at 20-years, GSP provided historical documents and property data to the Lender and the Appraiser illustrating how the remaining economic life of 20-years was incorrect. GSP leveraged their long standing lender relationship and worked carefully with the appraiser to get the amended economic life up to 30-years. , This allowed the Lender to adjust their amortization back to 30-years as well.

Alternative Financing Cheaper than Traditional Mezzanine Debt and Preferred Equity

George Smith Partners is working with a private source of CPACE (Commercial Property Assessed Clean Energy) capital to finance ground-up development in California, Colorado, Utah, Texas, and 18 other states. CPACE is a form of long-term, non-recourse mezzanine financing for construction projects. At rates of 6% to 7%, it can fill 10-20% of the capital stack for a 20 to 25 year term. The financing is repaid through a special property assessment and amortizes like debt. CPACE can be used for any asset class, on projects of any size, in the 22 states where PACE has been approved. PACE can be used alongside other forms of financing such as New Market Tax Credits, LIHTC, TIF, EB-5, and traditional senior financing, among others. The main benefit to sponsors is reduced cost of capital – PACE replaces more expensive mezzanine debt or preferred equity in the capital stack.

More Hot Money ›

Pascale's Portrait
Formula For A New 7 Year High for the 10 year T

Interest rates are front and center today as the 10 year yield broke through a critical key technical level and is now up to 3.20%. The yield has risen 40 basis points in the last 45 days. The rate has not been above 3.12% since 2011. A perfect storm of factors is fanning the flames: (1) The new NAFTA agreement removes a major uncertainty for US growth, and markets seem to have accepted continued rocky US-China trade relations (for now); (2) The mid September expiration of a special tax benefit for pension funds purchasing Treasuries has had an effect on demand, buying from these major purchasers has slowed, and it seems like this anomaly held rates down in August and September as they loaded up before the deadline; (3) Continued good news on the US economic front, today it was the ISM non-manufacturing index hitting 61 vs a 58 estimate, a post recession high. We may be entering a “new” reality, or is it the return of the “old” normal of pre-recession metrics with treasury yields in the 4-5% range. 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 (310) 867-2995 or


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