FINfacts™ XXIV – No. 212 | April 8, 2020

MARKET RATES
Prime Rate 3.25%
1 Month LIBOR 0.86%
6 Month LIBOR 1.22%
5 Yr Swap 0.60%
10 Yr Swap 0.81%
5 Yr US Treasury 0.47%
10 Yr US Treasury 0.76%
30 Yr US Treasury 1.37%

INTRODUCTION

There are encouraging signs that social distancing and self-quarantine are turning the tides on the fight against COVID-19. China has begun to lift quarantines and Italy appears to have reached the apex of its fatality curve. As the growth rates of viral infections slow, both the U.S. & European markets have seen giant stock rallies.

The Impact on CRE Capital
As the economy and world transition, capital providers in the commercial real estate industry are adapting to increasing risk profiles. The widespread effects of putting our economy on hold will inevitably result in missed rent, forbearance, and potential defaults. Even with such difficulties, capital providers with dedicated funds must place capital to continue operations. Here are some of the changes that George Smith Partners has observed this week.

Interest reserves: New multifamily loans require an interest reserve of at least 6 months, but more likely 12-18 months.

Vacancy factor: Lenders are very cognizant about underwriting to actual vacancy rather than a market vacancy factor.

Less cash out: Lenders are limiting or eliminating cash out financing, which has reduced the leverage of many loans.

Less non-recourse: Loans that could previously be approved for non-recourse are now requiring various recourse provisions. We have seen 2 years, top 50%, or step down/burn off recourse.


RECENT TRANSACTIONS
$19,100,000 Construction Financing to 92.5% LTC on a 111-Unit, Class-A Apartment Community; St. Louis City, Missouri

Rate: Confidential
Term: Twenty-four-month initial term with one, 12-month extension option
Amortization: Interest only
LTC: 92.5%
Prepayment: Nine-months minimum interest
Guaranty: 50% repayment guarantee that burns down to 25% repayment guarantee upon certificate of occupancy (on senior loan only; does not apply to the non-recourse preferred equity investment)

Transaction Description:

George Smith Partners successfully placed $19,100,000 in construction financing, which funded 92.5% of the total project cost for the construction of a 111-unit second phase of a larger mixed-use multifamily and retail project located in the trendy St. Louis City neighborhood of The Grove. The financing structure included a senior loan to 85% LTC and a preferred equity investment with last-dollar exposure to 92.5% of total project cost. The preferred equity investment is non-recourse and the senior loan provides for only a 50% repayment guarantee that burns down to 25% upon certificate of occupancy. Additionally, the Lender and preferred equity investor gave credit for a lift in land value above the Borrower’s actual cost due to the Sponsor having owned the land since 2016 and it being the second phase of a larger project. GSP leveraged its expertise of the St. Louis market, long-standing lender relationships, and capital markets creativity to achieve the Sponsors goals of minimizing cash equity invested into the project due to how much value is being created in this phase of the project.

Advisors

Kyle Howerton
Senior Vice President
Michael Anderson-Mitterling
Senior Vice President
Olga Brandeis
Senior Vice President
David Stepanchak
Senior Vice President

$11,150,000 Acquisition and Reposition Financing on a Multifamily Property; 4% Debt Yield at Closing; Los Angeles, CA

Rate: 30-Day LIBOR + 3.25%
Term: Three years plus two 12-month extensions
Amortization: 36 months interest only
Max Loan to Cost: 63%
Prepayment: 15-month minimum interest period
Guaranty: Non-recourse
Lender Fee: 1.00%

Transaction Description:

George Smith Partners arranged the $11,150,000 first mortgage on a 1980’s vintage, 42-unit multifamily property in Northridge, California adjacent to a major Southern California University. The national balance sheet lender provided non-recourse financing at 63% of total project cost including 100% of future CapEx funds. This equated to $64,200/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 3.25% coupon requires interest rate risk protection and in order to minimize associated sponsor cost the Capital Provider 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 (4.15% debt yield), the Lender structured an interest reserve to cover debt service during the peak reposition period.

Advisors

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

SPEAKERS CORNER

WEBINAR

George Smith Partners and UCLA REAG (Real Estate Alumni Group) hosted a special webinar this afternoon, MARKETS IN THE DAYS OF COVID-19 with Tom Barrack, Founder and CEO of Colony Capital and Eric Sussman, Founder of Clear Capital, LLC and Adjunct Professor at UCLA Anderson. Evan Kinne, Senior Vice President of George Smith Partners introduced the speakers and facilitated the questions during the webinar.

A replay will be available by the end of the week.  It will be posted on gspartners.com

 


Pascale's Portrait
PASCALE'S PERSPECTIVE
COVID Crisis Nears It’s Peak in the U.S. With Hopeful Signs of “Curve Flattening”

Markets look to what comes next as the U.S. is seeing some benefits of the social distancing and shelter in place rules covering most of the nation, both credit and equity markets have rallied this week. “Back to normal” will not be achieved until a vaccine and treatments are widely available. The most optimistic estimates for a mass produced vaccine are for early-mid 2021. Most likely a “new-new normal” will be in place for the next year as the world starts to reopen. Widespread testing will be needed and will be accompanied by constant vigilance and fear of another wave of outbreaks. The gradualness of the comeback will most likely result in a more U shaped recovery rather than V shaped recovery. Retail will be altered as stores will encourage spacing, dedicated customer lanes that flow in one direction through the stores, sneeze guards everywhere, gloved and masked employees and customers. Offices will feature more spacing, testing of employees, and heightened sanitation measures, and more remote working. Demand for office space may change. Consumers willingness to fly, go to restaurants, stay in hotels, and attend conventions will be changed for the foreseeable future. A growing consensus of lenders and capital providers we are speaking with feel there will be some “marking to market” of valuations even after the economy has reopened. This may create issues for appraisers and lenders as they struggle to determine  “value” on the other side of this crisis.  This will create opportunity in the sales market along with challenges on how to underwrite future cash flow. Today we see many banks pausing on new loan submissions as they are inundated with submissions from small businesses for Paycheck Protection Program loans and other CARES act programs. The CMBS industry is intensely lobbying for private label CMBS to be eligible for Fed purchases. This is critical as the market is now basically frozen and CMBS is about 30% of commercial lending. The “max leverage CMBS loan” exit is the defacto underwriting threshold for almost all bridge and construction loans. Also, the Banks and Life Companies cannot handle the volume, nor do they offer as much leverage. To all of our readers, please stay safe out there and 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


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