FINfacts™ XXIV – No. 209 | March 18, 2020

MARKET RATES
Prime Rate 3.25%
1 Month LIBOR 0.75%
6 Month LIBOR 0.77%
5 Yr Swap 0.78%
10 Yr Swap 1.05%
5 Yr US Treasury 0.79%
10 Yr US Treasury 1.18%
30 Yr US Treasury 1.76%

INTRODUCTION

Capital Markets React to Rapidly Evolving Coronavirus (COVID-19) Situation

Notes from the CRE Capital Markets World:  The economic impacts of the unprecedented measures being implemented to slow the spread of the Coronavirus are reverberating throughout commercial real estate (all product types and lenders).  The reassuring news from the Capital Markets is, “this is not a credit crisis”.  Unlike 2008, most lenders have liquidity.  Much of this is due to the unprecedented and timely actions from both our government and the Federal Reserve in a coordinated response.  The hotel and retail industries have been enormously impacted.  Multifamily, office and industrial are not exempt as businesses and individual’s income and ability to pay rent is deteriorating.

Indexes:  30-day LIBOR is 0.75%, Prime Rate is 3.00%, the 10-year T is 1.25%.  Risk spreads are widening, and many lenders are quoting an absolute coupon.

CMBS:  Some lenders are quoting, some are not.  Hotels are facing extraordinary headwinds and retail, while difficult, is being quoted.  Spreads on new issue AAAs have widened from Swaps + 85 (early February) to Swaps + 200 (that’s basically an educated guess from originators as nothing has priced definitively until next week).  New loans are pricing in the 4.00-4.25% for a 10-year loan with tighter underwriting.  Fannie/Freddie: Quoting and closing loans albeit at higher spreads, 10-year fixed rate anywhere from 3.60-4.00%

Portfolio Lenders:  Banks, Debt Funds, Specialty Lenders: GSP has spoken to several capital providers using this as an opportunity to gain market share and step in where other lenders have bowed out.   “Rescue Capital” is the buzzword of the week as these lenders are looking “to the recovery” for good real estate.  Equity: We are seeing some investors pivot entirely from the stock market looking for the “hard asset” advantage of commercial real estate.

Construction Lenders:  For the moment hotel construction is being more heavily scrutinized but is still being considered if delivery is a year plus out. Likewise, for retail and office.  Ground up multi-family and industrial are asset classes lenders are leaning into, with lenders dropping both their coupons and floors and coupling that with banks quoting up to 70% advance rates on project capitalization.

All this is being done in the “new world” of virtual meetings and calls. At this point all financial institutions we are in contact with are conducting business remotely, virtual meetings via Zoom and other providers are the norm and business is being conducted successfully.  Inspections of apartment properties are shifting as tenants are reluctant to allow appraisers and engineers to enter units, lenders are rapidly issuing new guidelines allowing for exterior inspections and relying on sponsors to verify that unit interiors are acceptable.

Government – Fiscal Policy and Legislation: “Shelter in place” guidelines, mandatory closures of all non-essential businesses and moratoriums on evictions are sweeping the country as state and local governments implement these measures.  Federal Government Stimulus (Fiscal Policy):  After passing 2 major bills to provide funding for healthcare needs and some relief to workers, a massive $1 trillion + stimulus bill is being quickly crafted by the Senate today: Bailouts for vulnerable industries (airlines, hotels, cruise ships, etc.) and direct payments to taxpayers (aka “Helicopter Money”).

The Fed:  The Fed has deployed their full power of the tools utilized during the financial crisis within a period of two weeks and so far has been successful in keeping credit markets functioning:  (1) A rare Sunday announcement lowering their overnight lending rate to zero; (2) Creating $2.0 trillion of repo lines which keeps liquidity in the system and allows the $15 trillion of outstanding treasuries to trade efficiently (this is the critical base for all fixed rate lending and fixed income bonds); (3) Guaranteeing dollar swap lines with other central banks; (4) Massive Quantitative Easing: Monday the Fed purchased $700 billion in Treasuries and Mortgage Backed Securities (Fannie, Freddie); What’s next: Unprecedented actions including the Fed directly purchasing corporate bonds and municipal bonds, and commercial paper, thereby using its unlimited balance sheet to directly support ailing industries.

 


RECENT TRANSACTIONS
$27,270,000 Refinance of 11-Property Portfolio; Fixed For 10 Years at 3.61%; Full Term Interest Only; Los Angeles, CA

Rate: 11 loans fixed at 3.61%
Term: 10 years fixed
Amortization: Full-Term Interest Only
LTV: 55%
DCR: 1.30x
Prepayment Penalty: Stepdown
Lender fee: 0%
Guaranty: Non-Recourse

Transaction Description:

George Smith Partners placed the $27,270,000 refinance of eleven stabilized Los Angeles multifamily properties totaling 302 units. The interest rate is fixed at 3.61% for ten years with full term Interest Only payments.

Since acquisition several years ago, the Borrower has invested a considerable amount in capital expenditures across the whole portfolio. Invoices were used to separate capital expenditures from recurring R&M expenses. This information helped to provide support for the Lender’s underwritten cash flow and property values. The Lender had previously provided the acquisition loan for the portfolio and is refinancing its own loans. For the refinance, they initially requested a higher level of due diligence than that of the previous loans. GSP worked with the Lender to waive these requirements and provide the same diligence as the loans from acquisition.

Advisors

Jonathan Lee
Principal/Managing Director
Shahin Yazdi
Principal/Managing Director
Jarod King
Senior Vice President
Matthew Kirisits
Vice President
Paul Monsen
Vice President
Kyle Redmond
Analyst

$7,000,000 Cash-Out, Non-Recourse, Refinance on a Single-Tenant Property; Venice Beach, California

Rate: 6.90% Fixed
Term: 12 Months
Amortization: Interest Only
Loan to Value: 60%
Lender Fee: 1.00%
Prepayment: Open Full Term
Guaranty: Non-Recourse

George Smith Partners arranged a $7,000,000 ($901/sf) cash-out, non-recourse, first mortgage from a REIT to refinance a single-tenant, owner-user office property in Venice Beach, California. The Lender was comfortable with providing the cash-out financing, although the single tenant was in bankruptcy protection due to the property’s irreplaceable location which is blocks from the ocean in Venice Beach. The financing provides 12 months of bridge term while the Tenant works through bankruptcy proceedings. Although the loan is non-recourse, the Lender did not require an appraisal or other third-party reports. Sized to 60% of the Lender’s underwritten value, the loan priced at 6.90% fixed for the 12-month loan duration.

Advisors

Gary E. Mozer
Principal/Co-Founder
Kyle Howerton
Senior Vice President
Michael Anderson-Mitterling
Senior Vice President

$3,200,000 Cash-Out Refinance for a Multifamily Property Still Under Renovation; Larchmont, CA

Rate: Prime + 0.5% (5.25% today)
Term: 5 Years
Amortization: 18 months interest only followed by 30-year amortization
LTV: 70%
Prepayment Penalty: None
Guaranty: Recourse

George Smith Partners placed a $3,200,000 cash-out refinance on a multifamily property in the trendy Larchmont submarket of Los Angeles, CA. The Property was a recent acquisition and still undergoing renovations as part of a value-added strategy. Despite this, GSP was able to source a bank lender offering a mini-permanent loan structure that met the Sponsor’s request for cash-out proceeds to re-invest in new development deals. Although the loan included a 12-month interest reserve a holdback for the remaining construction budget was not required. The financing was sized to 70% LTV and carries a rate of Prime + 0.5% (5.25% today). The loan carries a 5-year term and is interest only the first 18 months followed by a 30-year amortization.

Advisors

Zachary Streit
Senior Vice President

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HOT MONEY
Reserve Capital

Given the instability of the credit markets at this time while the “spigots” are on, rates and proceeds continue in a state of flux. To address certainty of execution “as applied for”, several debt funds, family office and private high-net-worth individuals have stepped in with their balance sheet and have the availability to fund and record within five business days. Rates vary depending on leverage, asset type and location. Pricing can range from 5.9% to 12.5+% for a 12 month term. Prepayment penalties are often limited and in some zero, to allow for recapitalization once stability returns to the institutional market.

More Hot Money ›

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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