FINfacts™ XXIV – No. 199 | January 8, 2020

MARKET RATES
Prime Rate 4.75
1 Month LIBOR 1.70
6 Month LIBOR 1.88
5 Yr Swap 1.65
10 Yr Swap 1.80
5 Yr US Treasury 1.66
10 Yr US Treasury 1.87
30 Yr US Treasury 2.34

RECENT TRANSACTIONS
$10,000,000 HOA Leasehold Acquisition to 100% of Purchase Price; Los Angeles, CA

Rate: 4.50%
Term: 10 Years
Amortization: 25 Years
Loan Recast: Allowed Twice Annually
Prepayment: None Twice Annually
Recourse: Entity level only
Lender Fee: 0.50%

Transaction Description:
George Smith Partners placed the acquisition financing of a leased fee for a Southern California condominium complex, sized to 100% of the purchase price. Our Sponsors, the Home Owners Association (HOA) owned their individual units but were subject to a ground-lease with 35 years remaining. Through the HOA, the individual homeowners were afforded a one-time purchase option to acquire the fee position and collapse the ground-lease assuming 100% participation in the acquisition. Their alternative would be to wait 35 years and lose all of their improvements to the expiring lease. Their equity interests would have zero value at that time and diminish rapidly as that lease termination date neared. Fixed at 4.50% for ten years, the loan amortized over 25 years. There is no warm body to sign repayment or carve-out guarantees. All recourse is limited to the HOA entity.

Challenges:
HOAs are governed by their CC&Rs and are precluded from owning any real estate. GSP effectively did not have a borrower to take title/ownership of the fee position without 100% consent from the homeowners. Assuming an accelerated amortization, any special assessment would more than double current HOA dues. Some owners have ample equity in their unit or cash on hand to cover their proration of the purchase and would seek to opt out of new financing to avoid the special assessment. A future unit buyer may choose to opt-out of the loan and pre-pay their allocation two years or more from now and again opt out of the special assessment. The Lender’s monthly mortgage payment would need to be recalculated with every pre-payment as more unit owners opted out of the special assessment cash flow used to support the monthly loan payment. The ground-lease payment currently in place did not support a $10,000,000 or any level of debt near that sale price; ie. the HOA could not just assume the ground-lease and leave it in place for the remaining 35-year term.

Solutions:
GSP identified a Southern California portfolio lender with an HOA lending unit. They specialize in capital improvement loans to HOAs and structure a pledge of cash flow/special assessment dues as their collateral. They do not need a recorded Deed of Trust for collateral. The acquisition was for the purchase and immediate collapse of the ground-lease. Individual unit owners would have the lease-hold designation removed from their title reports. The relatively low interest rate on the loan coupled with a 25-year amortization schedule minimized the impact to the monthly dues assessment. Unit owners on a case-by-case basis were permitted to opt out with their prorated cash allocation. The loan allows for a partial prepayment two times each year without penalty. The loan will be reamortized at that time over the remaining amortization term to lower the monthly payment as more homeowners opt out of the special assessment payment to the HOA.

Advisors

Jonathan Lee
Principal/Managing Director
Shahin Yazdi
Principal/Managing Director
David Stepanchak
Senior Vice President
Matthew Kirisits
Vice President
Olga Brandeis
Senior Vice President
Kyle Redmond
Analyst
Paul Monsen
Vice President

$4,000,000 Cash-Out Equity Capitalization Bridge Loan; Beverly Hills, CA

Rate: 8.0%
Term: 1 Year
LTC: 90%
Amortization: Interest Only
Guaranty: Non-Recourse
Prepayment: None

Transaction Description:

George Smith Partners arranged cash-out financing for developers of a high-end luxury home in Beverly Hills to pull out trapped equity and prepare for a future construction loan. The long-term goal was to obtain highly leveraged, non-recourse construction financing that will utilize the equity from this transaction. The first step was to capitalize the Property. The Property had a $4,400,000 as-is value and a $19,000,000 as-completed value. GSP obtained a $4,000,000, 90% LTC that will provide the ownership with equity capital.

In today’s market, it is challenging to find capital providers willing to provide high leveraged, cash-out financing for land. Using our relationships, GSP was able to identify a non-recourse lender who would provide highly leveraged, cash-out financing to 90% LTC. By completing the first stage of financing the ownership will have the needed capital for a larger future construction loan.

Advisors

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

80% Loan to Cost, Non-Recourse Acquisition Bridge Financing for a 20 Unit Multifamily Property in South Los Angeles; Closed in 30 Days with No Lender Legal

Rate: 7.25%
Term: 3 Years
Amortization: Interest only
LTC: 80%, including future funding
Guaranty: Non Recourse
Lender Fee: 1% in / no exit fee
Prepayment Penalty: 12 month interest guarantee

George Smith Partners arranged $2,300,000 in non-recourse acquisition bridge financing for a value-add multifamily property in the South Los Angeles. The 20 unit, 1920’s vintage property had significant deferred maintenance and below market rents. The Sponsor’s business plan was to reposition the property, buyout tenants and release the units at market rents. The transaction carried a very short 30 day closing time frame.

Sized to 80% of total project cost, the loan includes future funding for tenant buyouts, a full gut renovation of unit interiors and an exterior upgrade. The three year bridge loan is interest only and carries a fixed interest rate of 7.25%. Interest is not charged on the hold-back until funds are drawn. The lender fee was limited to a 1% origination fee with no exit fee. The lender did not charge a legal fee and closed the transaction in 30 days from term sheet execution.

Advisors

Zachary Streit
Senior Vice President

Pascale's Portrait
PASCALE'S PERSPECTIVE
New Year’s Then and Now, Steeper is Better?

Today’s yield curve is striking for it’s “normality”, ie. it is uninverted and fairly steep. One year ago today, the 2, 5 and 10 year treasury yields were bunched together, all within about 10 bps (2.55%, 2.58% 2.67%). The yield curve then inverted in August as the 10 year dipped below the 2 year yield. Today’s yield curve (1.57%, 1.65%, 1.87%) indicates confidence in the economy (high 10 year yield) and in the Fed’s promise to stand pat with no rate increase this year (lower 2 year yield). So 2020 begins with lower rates and a healthier curve. With low delinquency rates, an active secondary market, large allocations from portfolio lenders, and overall solid fundamentals, 2020 looks like another big year for commercial mortgage loan volume. For example, the Mortgage Bankers Association predicts an all time high in multifamily lending in 2020. Commercial activity is also predicted to be strong, with the notable exception that lenders are cautious on retail. As the economic recovery goes into year 11, it’s noteworthy that markets basically shrugged off potential escalation of conflict in the mid-East and uncertainty about U.S. China trade resolution.  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


WWW.GSPARTNERS.COM

Constellation Place
10250 Constellation Blvd., Ste. 2700
Los Angeles, CA 90067
Office 310.557.8336
Fax 310.557.1276
Email finfacts@finfacts.net
© 1999 - 2020 George Smith Partners, Inc. DRE # 00822654 FINfacts is an ePublication of George Smith Partners, Inc. For Promotional Purposes Only. All Rights Reserved.
Hi, just a reminder that you're receiving this email because you have expressed an interest in George Smith Partners. Don't forget to add finfacts@finfacts.net to your address book so we'll be sure to land in your inbox!

You may unsubscribe if you no longer wish to receive our emails.