FINfacts™ XXIV – No. 304 | February 9, 2022

MARKET RATES
Prime Rate 3.25%
1 Month LIBOR 0.13%
6 Month LIBOR 0.64%
5 Yr Swap 1.87%
10 Yr Swap 2.00%
5 Yr US Treasury 1.82%
10 Yr US Treasury 1.95%
30 Yr US Treasury 2.24%

RECENT TRANSACTIONS
$46,890,000 Debt and JV Equity Financing for a Ground-Up Single-Family Build-to-Rent Development; Phoenix, AZ

All Terms Confidential

Transaction Description:

George Smith Partners successfully arranged a total of $46,890,000 in non-recourse debt and joint venture equity financing for the ground-up development of a single-family build-to-rent community in Phoenix, AZ. The Project spans approximately 14 acres and will feature 185 units across 150 stand-alone residential buildings located just 15 minutes west of Downtown Phoenix. The financing capitalized the acquisition of the development and related construction costs.

The Sponsor, a top tier homebuilder based in the Southwest, identified the site as an ideal candidate for re-entitlement to residential, and worked alongside the City to fast-track the change of use. The development team recognized the top-tier investment potential of the site given that build-to-rent product has been the fastest growing asset class in the U.S. housing market. Demand has grown exponentially as new ground-up single-family rental communities in the Phoenix area are not only averaging high absorption rates, but they are also achieving 42% rent premiums over neighboring garden-style apartments. GSP was able to identify a non-recourse construction lender with strong local knowledge that understood the high value of the re-entitled land, the strong local need for rental housing, as well as the Sponsor and joint venture equity partner’s extensive background and expertise in the BTR space.


$21,250,000 Construction to Perm Multifamily Financing; Los Angeles, CA

Rate: 3.6% Floor Fixed for 7 years then 12MAT + 2.75%.
Term: 10 Years
Amortization: Interest Only for 36 months with a 6-month extension.
Guaranty: Recourse
Min DSCR on Perm: 1.15:1.0
Loan Fee: 1%
Prepayment: 2%, 2%, 1%, 1% Years 1-4

Transaction Description:

George Smith Partners secured a $21,250,000 construction-to-bridge loan for a new 52-unit high-end multifamily community located in West Los Angeles on a busy prominent corner. The recourse loan will fund construction and transition into a perm loan with a total term of 10 years. The all-in-one loan represents 60% loan to stabilized value and 70% loan to cost and is structured with a 3-year (+ 6-month extension) interest-only period. The loan allows for open prepayment after year 4 without penalty. Prior to, the prepayment penalty is 2% in years 1 and 2 and 1% for years 3 and 4.

The site is comprised of 5 legal parcels assembled by the Borrower beginning in 2011 through 2015. The proposed Project will consist of 51 residential units and one ground floor retail unit in a Type III, 5-story building with two levels of subterranean parking for 72 cars utilizing a state-of-the-art automated parking system. The proposed unit mix includes studio, 1, 2 and penthouse units as well as 5 live/work units and 4 affordable rent restricted units. Penthouse units include unique/large, covered terraces as well as roof top decks with expansive skyline views.

GSP was able to secure a lender that underwrote to the proforma stabilized NOI despite the challenges faced during the pandemic especially with higher-end product.


$3,800,000, 73% LTC Land Loan for Multi-Tenant Spec Industrial; Mesa, AZ

All Terms Confidential

Transaction Description:

George Smith Partners arranged $3,800,000 (73% LTC) in non-recourse, bridge financing for the acquisition of two parcels of industrial zoned land in Mesa, Arizona. The Sponsors will develop the land into four multi-tenant, speculative industrial buildings catering to small and mid-sized industrial tenants.

With two weeks remaining in the escrow period, and with the Sponsor’s wish to arrange a non-recourse, high leverage land loan, GSP sourced a lender who was comfortable with the value and was able to close in 8 days while giving credit to the lift of the land’s appreciation during the seller’s escrow period. The loan resulted in 73% loan to cost, which is much higher than standard market leverage. Furthermore, the Lender was willing to go even higher at 78% LTC, but the Sponsors ultimately did not end up needing that much leverage.

Advisors

Scott Meredith
Managing Director & Principal

Picture
HOT MONEY
Multifamily Permanent Financing Starting at 3.20%

George Smith Partners is working with a capital provider funding non-recourse permanent debt to 75% of value. With a strong appetite for Multifamily, Office, Industrial, Retail, Self-Storage and Mixed-Use properties the Lender offers fixed rates starting at 3.20% for 5-year loans in California, Arizona, Colorado, Idaho, Nevada, Oregon, Texas, Utah and Washington for transactions up to $25,000,000. The Lender has interest-only options available along with aggressive underwriting down to a 1.15x DSCR.

More Hot Money ›

Headwinds and Tailwinds Ahead for Commercial Real Estate

By: Gary M. Tenzer & Dasha Savchenko

Despite the Federal Reserve signaling that it will take strong action to stem an inflation rate of over 7% brought about by pandemic related supply chain constraints and a super-heated economic expansion, George Smith Partners remains optimistic for commercial real estate capital markets in 2022.

In response to the economic shut-down caused by Covid quarantines, the Federal Reserve cut interest rates close to zero and started several rounds of “quantitative easing” by buying trillions of dollars of Treasury bonds and mortgage-backed securities to keep interest rates low and to stimulate the economy to stave off a recession or worse, a depression. In March 2021, Congress passed the American Recovery Act to also provide economic stimulus, provide rental assistance, vaccination programs, retrofitting of schools, etc. Low interest rates and abundant capital spurred commercial real estate investment and high valuations. Since then, U.S. rates have remained low and values high. However, with 7% inflation in 2021, the highest rate since 1982, the Fed has announced steps to wind down its $9 trillion balance sheet and increase interest rates five or more times in 2022 in efforts to stem recent inflation. As of early February 2022, the 10-year Treasury rate, the benchmark off which long term, fixed-rate commercial mortgages are priced, has risen to pre-pandemic level of 1.9%, the highest since January 2020.

Short term rates, which are tied to the Fed’s benchmark “Fed Funds Rate”, have ranged between 0% and 0.25% over the past year and are expected to increase by about 100 basis points over the course of 2022. Short term rates have increased approximately 5 basis points but are expected to adjust further in lockstep with adjustments in the Fed Funds Rate when the Fed meets in March.

Despite the Omnicron surge in December and January, the Labor Department announced an exceptionally strong Jobs Report for January of 467,000 seasonally adjusted new jobs and that the U.S. economy has regained more than 19 million of the 22 million jobs lost at the onset of the pandemic. The strong jobs report is likely to reinforce the prospects for the Fed to increase the Fed Funds Rate, aggressively.

TAILWINDS
A rise in interest rates may prompt lenders to be more aggressive on new loans in 2022 as they look to pad their net interest margins while benchmark rates are still relatively low. CMBS and Life Co. loan volume will also remain strong as borrowers will seek to lock in lower rates and refinance legacy high-rate loans and newly stabilized properties. Commercial banks will continue to lend on new construction, selectively and non-bank lenders, such as debt funds, will continue to lend aggressively to put their abundant liquidity to work.

HEADWINDS
NOIs will come under inflationary pressure as not all increases operating expenses caused by rising labor and material costs, utilities, etc., can be passed on to tenants. Revenue growth may be impacted by increased regulations in some states (such as rent control and eviction moratoria on multifamily) or by existing lease provisions and market supply & demand. As a key metric in loan underwriting, constraints on projected NOI growth will result in lenders adopting a generally more conservative lending philosophy.

GREAT OPPORTUNITY AHEAD
Clearly, 2022 will bring change to commercial real estate capital markets; however, unlike previous cycles there is abundant liquidity available for good projects and interest rates, although slightly higher, are still close to the bottom. Since our founding in 1992, George Smith Partners has led our clients to the smartest capital choices through changing capital markets, as well as interest rate cycles and changes in liquidity. We see only great opportunity ahead in 2022.

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


WWW.GSPARTNERS.COM

Constellation Place
10250 Constellation Blvd., Ste. 2700
Los Angeles, CA 90067
Office 310.557.8336
Fax 310.557.1276
Email finfacts@finfacts.net
© 1999 - 2024 George Smith Partners, Inc. DRE # 00822654 FINfacts is an ePublication of George Smith Partners, Inc. For Promotional Purposes Only. All Rights Reserved.
Hi, just a reminder that you're receiving this email because you have expressed an interest in George Smith Partners. Don't forget to add finfacts@gspartners.com to your address book so we'll be sure to land in your inbox!