FINfacts™ XXIV – No. 169 | May 29, 2019

MARKET RATES
Prime Rate 5.50
1 Month LIBOR 2.43
6 Month LIBOR 2.54
5 Yr Swap 2.07
10 Yr Swap 2.21
5 Yr US Treasury 2.07
10 Yr US Treasury 2.26
30 Yr US Treasury 2.70

RECENT TRANSACTIONS
$20,000,000 3-Year Revolving Credit Facility for 88 Co-Op Units in Midtown Manhattan, New York

Rate: L+525 with a LIBOR floor of 2.25%
Term: 24+6+6 with 50bp extension fee on outstanding principal balance
DY Requirements/Prepay Penalty: None
Minimum Interest/Yield Maintenance: None
LTV: None specified but between 45% – 50% is starting LTV
Unused Line Fee: between 0.10% and 0.5% depending on line usage amortized over 24 months
Reserve: 6-months of Interest and Maintenance Fees

Transaction Description:

George Smith Partners secured a $20,000,000 revolving credit facility on 88 co-op units in Manhattan. The 88 co-op units are part of a 495-unit “family legacy” property that includes 72 rent stabilized units that have been owned and operated by the Sponsor since the 1990s. The Sponsor has never forced a tenant “buy out” during their ownership history. The 3-year credit facility is based on an ‘as-is’ LTV of 50%, full recourse, interest-only at L+525 with a LIBOR floor of 2.25%, no minimum interest and no prepayment penalty. The value of the underlying collateral ‘as-vacant’ is in excess of $100,000,000 due to the strong demand in this section of Midtown Manhattan. The historical negative combined average NOI from the Project, due to the 72 rent stabilized units, resulted in an ‘as-is’ value of ~$40,000,000. The average NOI for the rent stabilized units at closing was negative $484 per unit/per month while the NOI for Market Rate Units was positive $2,600 per unit/per month.

Challenges/Solution:

The non-traditional security for the loan (shares in a corporation and interest in proprietary leases) combined with the historical negative cash flow were non-starters for most lenders. The operating metrics i.e., debt yield and debt service coverage ratio did not meet typical lender requirements. GSP identified a lender that understood the value of the underlying collateral, was comfortable with the historic rate of turnover and was comfortable with the natural rate of attrition. The Lender was able to underwrite the upward-trending in-place income at a starting debt yield of < 2% while making the entirety of the credit facility available to the Sponsor.

Advisors

Alina Mardesich
Senior Vice President
Michael Smilove
Assistant Vice President

Acquisition Financing for Specialty Use Production Space at 66% LTV in Los Angeles, CA

Rate: Prime + 0.25%
Term: 5 years
Amortization: 1 year interest only, then 25 years
Prepayment Penalty: None
LTV: 66%
DCR: None for the first year, then 1.25x

Transaction Description:

George Smith Partners secured a 66% LTV acquisition loan for a vacant theatre space in Los Angeles. The loan provides 66% of the purchase price at a floating rate of Prime + 0.25%. The Sponsor plans to convert the theatre to a production studio/event space.

Several challenges were encountered while discussing the transaction with lenders. Many lenders were not willing to make a loan on a specialty use property. The Property had limited operating history as a theatre so detailed historical financial statements were not available. Furthermore, our Sponsor’s plan is to convert the Property to a new use.

These risks were mitigated when the Sponsor signed a master lease with a well-established, financially strong production company. Although the tenant will not move in for several months post-closing, the selected Lender was able to structure upfront reserves for capital expenditures and interest payments. The Lender waived the debt coverage ratio test for the first year after which the Property will cover at a 1.25x DCR.

Advisors

Shahin Yazdi
Principal/Managing Director
Jonathan Lee
Principal/Managing Director
David Stepanchak
Senior Vice President
Olga Alworth
Senior Vice President
Samuel Sarshar
Assistant Vice President

Acquisition Bridge Financing for a 12 Unit Multifamily Property in South Los Angeles, CA; 70% LTC

Rate: Prime + 0.5%
LTC: 70% / 65%, including 100% of future funding
Term: 2 Years
Amortization: Interest Only
Prepayment Penalty: None
Recourse: Full Recourse
Lender Fee: 0.5%

Transaction Description:

George Smith Partners arranged acquisition bridge financing for a value-add multifamily property in the Hyde Park Neighborhood of South Los Angeles. The 12 unit, 1940’s vintage property had significant deferred maintenance and below market rents. The Sponsor’s business plan was to reposition the Property and release the units at market rents. Sized to 70% of total project cost, the loan includes 100% of future funding for a full gut renovation of unit interiors and an exterior upgrade.

The two year bridge loan is interest only and floats at Prime + 0.5% (6.00% today) with no prepayment penalty. Interest is not charged on the holdback until funds are drawn. The Lender also only required a recourse obligation from the General Partner, who represented only 10% of the equity, even though there were limited partners representing over 25% of the equity. The lender fee was negotiated down to 0.5%.

Advisors

Zachary Streit
Senior Vice President

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HOT MONEY
Non-Recourse Hotel Financing

George Smith Partners identified a direct hotel financier funding permanent hotel bridge, mezzanine loans and preferred equity investments secured by hotel assets for acquisitions, recapitalizations, cash-out re-financings, PIP/Renovations, Conversions and Construction Takeout and Partner Buyouts. Their focus is for Premium/Select Service branded Hotels with 250 keys or less. Permanent financing up to $50 million; fixed for 20-30 years at 4.5%-6.5% with terms up to 10 years and leverage up to 80% of cost. Bridge debt to $50 million; fixed or floating at 6.0%-9.0% with terms to 5 years and 85% of stabilized value. Mezzanine tranches to $10 million; rates from 12%, Interest only or matched to senior loan. Leverage is limited to 85% of value. JV Equity available for Opportunity Zone projects and Preferred Equity to $10 million; rates between 13%-20% to 95% of cost. There is no participation for the Pref Equity once their returns are realized.

More Hot Money ›

Pascale's Portrait
PASCALE'S PERSPECTIVE
Wordwide Bond Yields Plummet, 10 Year T at 2 year Low

The “risk-off” trade accelerated this week as the US-China trade rift accelerated with ever more heated rhetoric. The recent threats by China to limit exports of critical rare earth minerals fueled stock market selloffs and helped drive investors into “safe haven” government bonds. The 10 year T hit a low of 2.21% today, a near 2 year low. Japanese and German 10 year bond yields are negative, so again, the US is trading at a yield premium. The 3 month Treasury yield is a full 10 bps higher than the 10 year yield, a case of extreme partial yield inversion, often a harbinger of a recession. CMBS spreads are widening in the secondary market by about 6-8 bps on AAA paper with further widening in the lower tranches. Life companies may institute higher floor rates. All-in loan rates are still strong as they are benefiting from lower indices (being driven by anticipation of future slowing) along with spreads still hanging tight as present economic conditions are still relatively strong. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

More Perspectives ›

Jonathan Lee, Principal/Managing Director at GSP tells Denise Pellegrini of Bloomberg that demand for multifamily is intensifying in some metros.  Click here to listen.

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 TAugust@GSPartners.com

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