FINfacts™ XXIV- No. 79 | July 31, 2017

Prime Rate 4.25
1 Month LIBOR 1.23
6 Month LIBOR 1.45
5 Yr Swap 1.89
10 Yr Swap 2.22
5 Yr US Treasury 1.82
10 Yr US Treasury 2.26
30 Yr US Treasury 2.89

$21,635,000 Non-Recourse Ground-Up Construction Loan for 35 Unit Condominium to 80% of Cost

Rate: 10%
Term: 2 Years + two-6 Month Options
Loan to Cost: 80%
Fee: 1.0%
Recourse: Completion Guarantee from an Off-Shore Investor

Transaction Description
George Smith Partners placed the ground-up development loan of 35 “For Sale” Los Angeles residential units over a 2,000 square foot retail unit. Offering convenient mass-transit and surface street access to employment centers in the Valley and minutes to downtown Los Angeles, this sub-market witnessed double-digit price growth year-over-year since 2011; yet housing is still significantly constrained by availability. Walking distance to a number of “hip” restaurants, entertainment, and boutique retail has made this area a weekend destination for many Los Angelinos. Sized to 80% of total cost, the two-year term allows for two-6 month options to extend and is priced at 10% for this non-recourse debt.

No construction had been completed in this sub-market since the residential down-turn; unit sales comparables do not exist. A significant amount of grading is necessary to create the pedestal. Our General Contractor lacked this level of grading experience. The Sponsor is not an American citizen and lacks real or liquid assets here in the U.S. Hard costs increased while under due diligence.

Recent downtown Los Angeles unit sales far outpriced our Sponsor’s proforma. The ease of downtown access and less urban density permitted our underwriter to accept out-of-market sale comps in their valuation. A sizable reserve is held by the lender until all grading is completed and the pedestal is poured. Once the subject is above-grade, funds will be released and allocated to the balance of the development. Our Sponsor’s vested interest, capital contribution, and retention of a local developer supported this request regardless of where his assets are held. GSP worked with the capital provider to increase loan proceeds in lock-step with an additional equity contribution to address increased hard costs.


Jonathan Lee
Principal/Managing Director
Shahin Yazdi
Principal/Managing Director
David Stepanchak
Senior Vice President
Matthew Kirisits
Vice President

$15,300,000 Non-Recourse Multifamily Construction Loan for a 97-unit apartment community in Chula Vista, California

Rate: 30-day LIBOR+ 4.80%,
Term: 30 months with Two (2) separate consecutive six (6) month extensions
Amortization: Interest Only for initial term
LTV: 60%
LTC: 65%
Origination Fee: 1.00%
Exit Fee: None
Guaranty: Non-Recourse with completion guaranty

Transaction Description
George Smith Partners secured $15,300,000 in ground up senior construction financing for a to-be built 97-unit apartment community in Chula Vista, CA. The Sponsor was seeking capital to cover all hard costs, in addition to some soft costs, for the project. The subject, which is directly west of the Interstate 805 Freeway and roughly three miles east of the Interstate 5 Freeway, will be built using a “stone creek” concept to match the ascetics of the surrounding environment. In addition to the luxurious ambiance, the project will include lush amenities. A park will be dedicated to the project with barbeque and picnic areas. There is a protected creek running through the land which will be enhanced to embellish the “Stone Creek” concept. The financing structure secured by George Smith Partners allowed the Sponsor to complete the ground up development in one phase.

The main challenge encountered in the capital markets was the scope of the project in relationship to the Sponsorship group’s track record. Many capital providers were concerned that the ground up component of the project required a Sponsorship group with more experience in the field.

George Smith Partners used its extensive capital market relationships, knowledge, and resources in order to identify the right capital for the project. Once the right lender was identified, GSP addressed the lender’s concerns surrounding the scope of the project by demonstrating the strength of the General Contractor.

Non-Recourse Construction Loans Nationwide

GSP is originating non-recourse loans nationwide up to $50,000,000.  The lender will consider apartments, pre-leased retail, and special use including hospitality and self-storage.  The loans can have a duration as long as four years and will be interest only for the length of the term.  Borrowers who are startups with limited financial strength will be considered.  Leverage will be extended to 65% LTC.  The lender prides themselves on speed of execution.

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Pascale's Portrait
Treasury Yields Hold Steady, End of LIBOR Coming

The 10 year T continues to trade in a tight range around 2.25-2.30%.  Yields dropped yesterday due to anemic market data including a larger than expected decline in auto sales.  An interesting report surfaced yesterday indicating that inflation is “lurking beneath the surface” based on rising commodity prices that should affect consumer prices in late 2017 and early 2018.  As of now, Treasury yields aren’t reflecting that expectation.  Today’s Treasury Department announcement regarding 3rd quarter issuance did not include any announcement of issuance of ultra long (50 and 100 year term) bonds, even though a May 2017 announcement indicated they were considering the possibility.  This should help demand for 10 and 30 year bonds.  LIBOR Replacement Update:  The quest to replace LIBOR has been in the works since 2013 in the wake of the LIBOR fixing scandal.  The UK Financial Conduct authority recently announced that the goal to transition to alternative benchmarks is now the end of 2021.   Note that over $300 trillion of financial instruments (derivatives, swaps, etc) are tied to LIBOR at present.   It looks like the US is settling on a Treasury overnight repurchase (repo) rate based on the cost of overnight loans that use US Treasuries as collateral.   This rate will be regularly published beginning next year and is an indicator of a highly liquid market (about $660 billion in daily volume).    It looks like the UK will be using the Sterling Overnight Index Average (SONIA), other Euro countries may use EONIA (Euro Overnight Index Average), while Japan is leaning towards TONAR (published by the Bank of Japan).   Only the US alternative is a “secured” rate as it is backed by Treasuries.   The other rates are similar to existing LIBOR as they are not collateralized and will have to be closely monitored to avoid the corruption charges that doomed LIBOR.  Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

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