FINfacts™ XXIV – No. 210 | March 25, 2020

MARKET RATES
Prime Rate 3.25%
1 Month LIBOR 0.92%
6 Month LIBOR 0.98%
5 Yr Swap 0.60%
10 Yr Swap 0.78%
5 Yr US Treasury 0.51%
10 Yr US Treasury 0.85%
30 Yr US Treasury 1.40%

INTRODUCTION

Coronavirus Crisis, Massive Market Dislocation, U.S. Treasuries Go Negative, CRE Lenders React

The CV crisis continues to disrupt society and financial markets with unprecedented speed and force as huge parts of the economy have shut down in a 2-week period. Massive intervention by the Fed and the largest stimulus/aid package in our history hopefully are providing some “bottom” to the carnage. The general estimate is that the entire discretionary part of the economy is shut down (approximately 35%). Unemployment is skyrocketing. Tomorrow’s initial jobless claims will likely be between 2.5 and 6 million, and next week’s will be equally as bad (if not worse). For comparison, the largest monthly drop in employment during the financial crisis was approximately 900,000 workers (March 2009).

Stimulus Bill #3: $2 Trillion, that is 2,000 billion dollars. It includes aid to major corporations and small business with strong protections for workers as companies (large and small) are required to retain workers in order to get grants and loans. There will be direct checks to taxpayers and “unemployment insurance on steroids”. The Fed will now have another $4 Trillion in funds to buy treasuries, mortgage backed securities, and a new twist, agency CMBS (but not yet regular CMBS). Watch for the Fed to possibly guarantee corporate credit lines, buy corporate bonds, and regular CMBS.

Indexes: This morning the yields on the 1-month T and the 3-month T went negative. (1M = -0.03% and 3M = -0.01%). This means that someone purchasing that note will receive no interest and slightly less than the principal amount of the bond when it is redeemed at the end of the term. In other words, paying the U.S. Treasury to hold the money. This is unprecedented here although negative yields are common in Japan, Germany and other countries. The 10-year T is now 0.83%. The Treasury market is functioning more normally after an initial crash and fear factor last week that saw investors selling treasuries to hoard cash. LIBOR: 30-day LIBOR is the most common index for floating rate loans and usually tracks the Fed Funds rate closely. According to that logic, 30-day LIBOR should be 0-0.25% today, but instead it is 0.92% due to stresses in the overnight funding market. Note that its likely replacement, SOFR, is at 0.04% (matching the lower end of the Fed Funds rate). This period of dislocation will spur further debate on the wisdom of replacing LIBOR with SOFR.

Fannie/Freddie: Since agency lenders are backstopped by the government, they are still lending, locking rates, and funding. Spreads are higher, of course, with floors on the Treasury. Full leverage loan rates are 4-5% today, with lower leverage under 4.0%. Underwriting standards are being tightened and proceeds are lower as most new loans have interest reserves required (typically for 6 months – 1 year of interest payments).

Banks: The banks are much better capitalized today than they were in the Great Recession and we have seen many small and large banks originate new loan applications during these past weeks. Apartments, Office, and Industrial properties are getting quoted. Retail is much tougher but not impossible, if the borrower is willing to sign recourse. Generally, we are seeing rates up to about 4.50-5.00% for commercial properties, with leverage around 55-65% max. Recourse is prevalent. However, some banks are hitting the “pause button” with a moratorium on new originations for 30-60 days until there is more clarity on the overall economic and medical situations. Some of the top multifamily bank lenders in California are unfortunately out of the market now.

CMBS and CLO: These lenders are mostly on the sidelines as the secondary markets are frozen as selling of securitized loans has come to a standstill. Some major originators have large pools or single asset loans sitting on their books, unable to sell. Also, levered bridge lenders that draw on bank repo lines to lend at higher rates are basically frozen as bank lines are being called. CMBS lending depends on low volatility and an active secondary market, and neither of these conditions exist right now.

Life Companies: Lending based on straight coupons. 5.00% is a common floor we are seeing. Only high-quality real estate, apartments, industrial, and office. Low leverage 55-60% LTV.

Specialty Lenders, Private Funds: Many well-capitalized fund lenders are active at higher rates. Rates are anywhere from LIBOR + 6 – 10% or a straight coupon in that range. These lenders are considering renovation and even construction loans. Thus, they are picking up business from borrowers who had lenders pull applications during this crisis.

George Smith Partners is here to help you during these uncertain times. Please call your GSP advisor for help with:

• Sources of rescue capital
• Strategizing through options and providing solutions
• Outsourced Financial analysis
• Restructure and bankruptcy advisory expertise


RECENT TRANSACTIONS
$12,375,000 Construction Loan for the Development of a 34-Unit Multifamily Property; 75% LTC; LIBOR+2.45%; Los Angeles, CA

Rate: Floating; 30-Day LIBOR + 2.45%
Term: 24 months plus two 6-month extension options
Amortization: Interest only
LTC: 75.0%
Fees: .75%
Guaranty: Recourse

Transaction Description:

George Smith Partners secured $12,375,000 in proceeds for the development of a 34-unit multifamily property located in the Greater Wilshire/Hancock Park area of Los Angeles. The proposed development will consist of 31 market rate units and 3 affordable units for very low-income households that are to remain affordable for a period of 55 years. Building plans were approved prior to loan funding; construction is scheduled to commence in March 2020 with an estimated completion date of approximately August 2021, resulting in an 18-month construction period.

The loan has a term of 24 months from closing with two 6-month extension options. The recourse loan will be secured by the land and the to-be constructed building. The fully funded loan represents 75% of the total project capitalization. The loan will be interest only for the 24-month term floating at 30-Day LIBOR + 2.45%. Upon completion the development will represent excellent quality multifamily units in an in-fill Los Angeles neighborhood. There are several projects currently under-construction in immediate proximity that will be competitive with the Subject Property. GSP selected a capital provider that was knowledgeable about the project’s location and the Sponsor’s experience to mitigate the new supply concerns.

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

$4,500,000 Non-Recourse Self Storage Adaptive Reuse Construction Financing Fixed at 4.75%; Orlando, FL

Rate: 4.75% fixed (Swapped out 1 Month Libor + 315 at closing)
Term: 4 years with a 2-year extension
Amortization: Interest only for the initial term; 25-year amortization thereafter
Prepayment Penalty: None (apart from Swap breakage)
LTC: 45%
Guaranty: Non-Recourse

George Smith Partners placed $4,500,000 in non-recourse construction financing for the adaptive reuse of a big box retail furniture store to convert to a 1,250-unit state of the art self-storage facility. The Property is located in Orlando, Florida, within a Qualified Opportunity Zone (QOZ) and was capitalized with a QOZ equity partner. Deal requirements included a non-recourse bank execution and best possible rate given the low leverage ask resulting from the QOZ equity partner’s significant investment in the Project.

GSP identified a bank lender that understood self-storage construction and found the institutional sponsorship attractive. The Capital Provider was willing to offer a simple, non-recourse execution and a swap product that resulted in a 4.75% fixed rate for the duration of the loan. A four-year initial term was offered to accommodate for the longer lease-up velocity common among self-storage properties.

Advisors

Zachary Streit
Senior Vice President

5-Day Close for Office Building, Owner-User, Cash-Out Refinancing; Los Angeles, CA

Rate: 7.9%
Term: One Year Term With 1 Year Option
Amortization: Interest Only

Transaction Description:
At the start of the Coronavirus crisis, George Smith Partners secured a $2,000,000 private money bridge loan to enable a business owner liquidity capital needed to grow his business. The loan paid off an existing SBA loan and provided approximately $1,000,000 in cash-out. The monthly payment on the new interest-only loan is lower than the existing financing due to the 20-year amortization. This is true even with the cash-out.

Challenges:
At the start of this crisis, we found a lender with liquidity who was able to move quickly and close within 5 days. Even with everyone shifting to working at home because of the crisis, the Lender stayed closed as promised.

Solution:
GSP used its experience and relationships to identify a lender who could understand the need to close on time in the middle of a global crisis. The new capital allows the Sponsor to expand their business, as other companies in their field are unable to access capital.

Advisors

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

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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