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FINfacts™ XXIV – No. 241 | October 28, 2020
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| Prime Rate |
 3.25% |
| 1 Month LIBOR |
 0.14%
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| 6 Month LIBOR |
0.25% |
| 5 Yr Swap |
0.42% |
| 10 Yr Swap |
0.81%
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| 5 Yr US Treasury |
0.33%
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| 10 Yr US Treasury |
0.77%
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| 30 Yr US Treasury |
1.56% |
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Construction Loan:
Rate: Prime plus .5% with 4.75% floor
Term: 24 Months
LTC: 65%
LTV: 65%
Mini-perm Loan:
Rate: 4.5%
Term: 5 Years
Amortization: 30 years
Prepayment: 2, 1, open
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Transaction Description: George Smith Partners placed the $14,100,000 construction to perm loan for an 86 micro-unit, co-living development located in an opportunity zone for an institutional sponsor and a national private equity firm. Optimized to provide a complete living experience with full in-unit accommodations on shorter term leases, the Project represents the first of its kind in the Los Angeles market. The 65% construction loan converts to a 5-year mini-perm loan fixed at 4.5%, synergizing with the Borrower’s long-term strategy and maximizes the opportunity zone benefits by eliminating future financial risks.
Challenges: The Project was heavily scrutinized due to COVID-19 and the concerns of close quarter living. Additional concerns arose from a macro level as the nation began to see an exodus from large cities. As further stress was placed on the underwritten income, the capital markets were struggling to find the last dollars needed. Additionally, many platforms had already largely paused construction lending, let alone found the risk tolerance to push leverage back to pre-lockdown levels. Finally, the Project is situated in an opportunity zone and the unique capital structure remains a relatively new concept for most lenders.
Solutions: GSP’s main objective was to secure a lender that was comfortable waiving underwritten DSCR and LTV requirements. It was also critical that the Lender would understand the intricately designed structural advantages the Project offered and how the product differentiated from everything else currently on the market. We further showcased that the Sponsor was of institutional pedigree, including their partnership with a national private equity group that specialized in opportunity zone investments and experience being among the most tenured co-living developers in the US.
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George Smith Partners has a client seeking early-stage development projects that are in need Co-GP equity. Our Sponsor has substantial financial wherewithal and bandwidth for additional projects. They are a looking to develop projects with total project costs between $30,000,000-$100,000,000 in Boise, Dallas, Phoenix, Salt Lake, Denver, and San Diego.
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For months investors have been pricing in optimistic scenarios: another big stimulus package, COVID treatments and/or vaccines on the horizon. This week has seen massive stock market selling and treasury yields dropping (risk-off).
Stimulus: Congress has recessed until after next Tuesday’s election with no deal. As analysts had “priced in” some pre-election stimulus, the market sell off was inevitable. So now the hopes for more stimulus are for the “lame duck” period. Trying to predict the likelihood of an agreement based on all the election variables is extremely murky (which party-parties will control the House, Senate, Presidency)? If the election results spur no action during lame duck, relief will not come until February 2021 at the earliest. We may see a “relief rally” next week if there is a good level of certainty surrounding the results. The need for stimulus is increasingly urgent as recent COVID developments are alarming. Another election variable is a disputed result scenario. Spikes have occurred in Europe and the US as the weather turns colder. Even with promising late stage vaccine trials and approval possibly by year end, the path to “normal” is now predicted to last well into 2021. Dr. Fauci today put it in perspective as he opined that it will take several months to achieve anything close to acceptable herd immunity. This puts the onus back on Washington to provide fiscal policy. The 10 year treasury dropped 13 bps to about 0.75% over the past few days. It’s a good bet that treasuries and other indices will remain low as central banks crank up the purchases. The question for commercial real estate investors is what direction will risk spreads and loan underwriting criteria take going into 2021? 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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Constellation Place
10250 Constellation Blvd., Ste. 2700
Los Angeles, CA 90067
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© 1999 - 2020 George Smith Partners, Inc. DRE # 00822654 FINfacts is an ePublication of George Smith Partners, Inc. For Promotional Purposes Only. All Rights Reserved.
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