FINfacts™ XXIV – No. 312 | April 6, 2022

MARKET RATES
Prime Rate 3.50%
1 Month LIBOR 0.45%
6 Month LIBOR 1.50%
5 Yr Swap 2.74%
10 Yr Swap 2.64%
5 Yr US Treasury 2.70%
10 Yr US Treasury 2.61%
30 Yr US Treasury 2.61%

RECENT TRANSACTIONS
$32,000,000 Construction Loan and $9,000,000 LP Equity for the Development of a For-Sale Residential Project; Hayward, CA

Total Project Costs: $45,000,000
Loan-To-Cost: 75%
Stabilized Loan-To-Value: 65%
Term: 30 Months
Amortization: Interest-Only
Guaranty: Non-recourse

Transaction Description:

George Smith Partners placed a $32,000,000 construction loan and $9,000,000 of LP Equity for a for-sale residential project in Hayward, California with a repeat sponsor. This Project will have 55 townhomes providing much needed workforce housing to the area. The Project will also have some affordable units for sale.

GSP was able to combine efforts and execute an effective and in-depth marketing campaign to help the capital markets understand the opportunity appropriately while finding solutions to various challenges that arose during the entire process. GSP marketed and highlighted the Project’s strength, the phasing nature of the build schedule, the projected sales prices and the forecasted upward trajectory in both sales price growth and sales pace growth. GSP was able to source capital providers on the Project that were comfortable with both the depth and experience of the Sponsor as well as believe in the continued growth of the Bay Area.

Ultimately, the professionalism and expertise of GSP on coupled with the proficiency and extensive experience of the sponsor allowed for a successful close.

Advisors

Gary E. Mozer
Managing Director & Principal
Ed Steffelin
Managing Director & Chief Investment Officer, AXCS Investments
Evan Kinne
Managing Director & President, AXCS Capital
Miles Musalman
Senior Vice President
Portrait Robert Horton
Senior Vice President
Portrait Blair Lewis
Vice President
Jordan Lipton
Vice President
Edmund Teo
Analyst

4,450,000 Cash Out Refinance Loan For 37-Unit Multifamily Property in Los Angeles, CA; 7 Years Fixed at 3.40%; 5 Years Interest Only Payments

Rate: Fixed at 3.40% for 7 years
Term: 7 years
Amortization: 5 Years Interest Only
Prepayment Penalty: 5,4,3,2,1%
Guaranty: Non-Recourse

Transaction Description:

George Smith Partners arranged $4,450,000 in financing for the refinance of a stabilized 37-unit mixed use property located in Los Angeles, California. The loan is fixed at a rate of 3.40% for 7 years. The new financing is a takeout of the acquisition loan that GSP closed five years earlier. Over the course of their ownership, the Sponsor performed a renovation of the Property and substantially increased the net operating income. As a result, the new loan provided a significant return of equity. The Lender held the rate of 3.40% even though interest rates increased while the loan was in application. Full credit was given for the income from two ground floor retail tenants. The loan has 5 years of interest-only payments.

Advisors

Shahin Yazdi
Managing Director & Chief Operating Officer, AXCS Capital
Jonathan Lee
Managing Director & President, AXCS Advisors
Miles Musalman
Senior Vice President
Matthew Kirisits
Vice President
Kyle Redmond
Vice President
Jessica Mania
Marketing and Business Development Associate

SPEAKERS CORNER

Antonio Hachem, Cornelius Baliukonis and Dana Light will be at the 2022 Retail Summit & Expo & the Denver Commercial Real Estate Outlook and Expo at the Aurora-Denver Conference Center on Wednesday, April 13th and Thursday, April 14th. More information about the event can be found here: Colorado Retail Summit & Expo


KIRISITS’ CORNER

No Free Lunch With Interest Rate Caps

Any borrower that has closed a bridge loan knows that an interest rate cap is required. A typical requirement for a bridge loan with a 3 year initial term looks like this:

At Closing, Borrower shall enter into an interest rate cap agreement with a counterparty
reasonably acceptable to Lender, in form and substance acceptable to Lender, for a term of
three (3) years and with a one-month CME Term SOFR strike price not to exceed
2.00%.

For the past several years, the market has been in a low and stable interest rate environment, and borrowers had little problem paying for a cap. Much has changed in the past 3 months. Due to interest rate volatility, the price of caps has exploded. The cost of a cap on a $10MM loan was about $23,000 at the end of 2019 but is now at least $173,000 (depending on the stipulations).

Source: Chatham calculator for $10MM notional loan

Several borrowers have asked us to find a way to reduce the cost of the cap. Usually, the easiest decision is changing the term. In nearly all cases, GSP has managed to get the initial term of the cap reduced to 2 years, with the requirement that the borrower purchase a new 1-year cap when the term expires. In the table above, reducing the term from 3 years to 2 years saves $124,000 in closing costs. Sometimes, the borrower can even refinance or sell within 2 years and will not have to renew. However, there is still risk with this change. The cost of renewing the cap in 2 years is unknown and it may be more expensive than anticipated.

With regards to the strike price, it is possible to increase the strike from 2.00% to 3.00%, but that comes at a tradeoff. The 2.00% strike price has a higher upfront cost, but it begins to provide a benefit as soon as SOFR goes above 2.00%. On the other hand, the 3.00% strike has a lower upfront cost, but does not provide a benefit until SOFR goes above 3.00%. Theoretically, SOFR could be stuck between 2% and 3% and the borrower will never hit the cap. The odds of these scenarios are factored into the price and thus there is “no free lunch” when choosing a strike price.

In fact, the forward SOFR curve currently predicts that the rate will hit 3.0% in about a year, but this will inevitably change as the Fed updates it guidance.


Source: Chatham

Another option is to enter a floating-to-fixed interest rate swap to lock in the rate. The borrower can fix the loan, but the tradeoff is that the fixed rate will be much higher than the initial floating rate. For example, a floating rate loan that starts at 3.50% could be fixed by paying an additional 2.50% swap rate, resulting in a fixed rate of 6.00% throughout the term of the loan. These types of swaps are highly customized and complex. The borrower should only enter a swap if they believe that the index rate will increase very quickly and by a large amount. By Matt Kirisits, Vice President at George Smith Partners

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 - 2022 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@finfacts.net to your address book so we'll be sure to land in your inbox!