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FINfacts™ XXIV – No. 237 | September 30, 2020
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| Prime Rate |
 3.25% |
| 1 Month LIBOR |
 0.15% |
| 6 Month LIBOR |
0.27% |
| 5 Yr Swap |
0.36% |
| 10 Yr Swap |
0.73% |
| 5 Yr US Treasury |
0.28% |
| 10 Yr US Treasury |
0.69% |
| 30 Yr US Treasury |
1.41% |
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Cumulative Preferred Return: 9.00%
Waterfall: Confidential
Hold: Expected 5 to 10 years with at least one refinance
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Transaction Description:
George Smith Partners was retained to source the equity required to build a 208-bed student housing project in a secondary market in Memphis, Tennessee. GSP faced many challenges in sourcing the equity needed for this project. During the COVID-19 pandemic, many colleges and universities changed from in person classes to online classes. Students had no reason to reside near or on campus except to be away from parents and near friends. There is increased demand for off campus housing because the universities are de-densifying the dorms. In addition, while this University was showing a growth in student population, it was not a “power” school with a large football program. These risks were mitigated by having a limited new student housing supply over the past two years, a best in class sponsor and a robust return on cost even with rents discounted due to COVID that could absorb short term shocks. The Investor and Sponsor also believe that this Project will open after a vaccine is found and perform as outlined in the proforma.
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Rate: Prime + 50 bps with a 3.75% floor for Construction, converting to 2.25% over 5-year treasury with a floor of 3.65% for mini-perm
Term: 2+5 year mini-perm
Amortization: IO then 30 years
LTV: 70%
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Transaction Description:
George Smith Partners secured a $4,690,000 construction loan with a 2-year term that converts to a 5-year permanent loan upon completion of construction for a total term of 7 years. The loan is for a medical office building in Oxnard, CA. The construction loan floats at Prime plus .5% with a floor rate of 3.75% and the mini perm is expected to have a fixed interest rate of 3.65%. The mini-perm carries a step down prepayment, but there is no prepay during the construction term, allowing the borrowers to secure more advantageous capital depending on the capital markets.
Challenges:
The Sponsorship sought long term construction-to-fixed capital shortly after the government-mandated shelter in place which caused significant disruption to the CRE capital markets. GSP needed to secure a high leverage loan to complete the ongoing construction of the Project which had commenced in 2019. With active construction on the Project, GSP needed to secure a lender capable of understanding various lien priorities, a historic building designation that changed construction plans and timelines, vandalism, and a change of general contractors all during the COVID-19 pandemic.
Solutions:
GSP was able to demonstrate the necessity of new medical offices during the height of the shutdown to generate a competitive lending environment, and to secure the 70% LTV construction loan. To reduce valuation risk, GSP negotiated that the existing appraisal performed pre-COVID would be utilized by the selected lender. To obtain maximum proceeds, GSP also worked with the Lender to collateralize adjacent unentitled land owned by the Sponsorship. The vandalism and the historic designation caused delay. However, GSP showed that the change in the GC was a strategic move that would allow for the completion of the construction and the ability of the sponsorship to obtain C of O in early 2021. This will allow the Sponsorship to hold the completely modernized Medical Office building with a fixed low rate through 2027.
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George Smith Partners is working with a national lender offering floating rate and mezzanine programs for transitional to stabilized office, retail, mixed use, industrial, multifamily and hospitality properties. The floating rate program starts at $5,000,000 with 3 to 5-year terms, up to 80% LTV/LTC depending on the asset quality/market and pricing is based on market rate spreads plus one-month LIBOR. The mezzanine program starts at $5,000,000 with 2-10-year terms and up to 85% LTC and pricing is 9% – 12%.
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Congressional and Administration officials are trying one last time to pass a stimulus bill before the pre-election recess. American Airlines announced 19,000 furloughs today which will be reversed only if new aid from Washington is forthcoming. Other major airlines (United & Delta) are expected to follow suit, and these layoffs will have a ripple effect throughout the economy. Many analysts are pointing to statistics that indicate the recovery from the 2008 Great Recession was slowed by the lack of continued stimulus. A large bill was passed in early 2009, but follow-ups were doomed by partisan wrangling. San Francisco Federal Reserve President Mary Daly today called for stronger fiscal policy from Congress: “We aren’t out of the woods yet, so we need a longer bridge”. She also said that there is weakness in the jobs market that the unemployment rate is not capturing.
Spotlight on Hotels: The hotel sector has been hardest hit by the pandemic. Recent weeks have seen permanent closures of high-profile hotels such as, The Luxe on Rodeo Drive in Beverly Hills and the “Crossroads of the World” Hilton on Times Square. Experts indicate that without significant aid from Congress the wave of closures is just beginning. CMBS has been the preferred loan execution for hotels for many years with $85 billion in outstanding hotel loans. Statistics from Trepp, the leading CMBS analytics group, indicate unprecedented stress on the sector. Loans delinquency are at 23.4%, highest on record (December 2019 it was 1.3%). The volume of delinquent loans exceeds the highest level reached during the Great Recession by 53%. Over 35% of CMBS loans are on servicer “watchlist” with 24% in special servicing now. The hardest hit MSA’s are New York/Newark, Houston, Chicago, Dallas, LA, Atlanta. All these metros were major convention and business travel hubs. There are some bright spots in the industry as many desirable drive-to destinations are experiencing high occupancy. Travelers are getting comfortable with procedures such as contactless entry, intense cleaning procedures, etc. It is apparent that a return to “normal” levels of air travel and business meetings will be dependent on the widespread distribution of an effective vaccine. This is estimated to occur in mid-2021 at best, so Congress must act or the industry will see waves of foreclosures over the next several months. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
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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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10250 Constellation Blvd., Ste. 2700
Los Angeles, CA 90067
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