GSP Insights

  • Reserve Capital

    Hot Money

    March 18, 2020

    Given the instability of the credit markets at this time while the “spigots” are on, rates and proceeds continue in a state of flux. To address certainty of execution “as applied for”, several debt funds, family office and private high-net-worth individuals have stepped in with their balance sheet and have the availability to fund and record within five business days. Rates vary depending on leverage, asset type and location. Pricing can range from 5.9% to 12.5+% for a 12 month term. Prepayment penalties are often limited and in some zero, to allow for recapitalization once stability returns to the institutional market.

  • Markets Reel on Coronavirus (COVID19), Crying Out for Fiscal Policy

    Pascale’s Perspective

    March 11, 2020

    Stocks, bonds, and credit markets are at peak volatility as the pandemic spreads worldwide.  Massive daily fluctuations have become the norm.  The economy may be in recession now according to many analysts.  The global economy may come to a near halt with increased unemployment, slowdowns in consumer spending and business investment.  Predictions are out the window as the spread of Coronavirus has surpassed precedents such as Ebola, SARS, MERS, etc.  The uncertainty is contributing to the volatility.  The classic “Fed put” whereby the Fed cuts rates and soothes markets is not going to cut it this time.  With treatments or vaccines most likely months or years away, markets are clamoring for the full arsenal of government tools: strong crisis level fiscal and monetary policy from the U.S., a coordinated maximum response.  England did their part yesterday, as the Bank of England cut rates and Parliament committed to fiscal stimulus. This was apparent with markets plummeting after a rare Fed non-meeting emergency rate cut.  Various stimulus plans are being discussed in Washington: President Trump speaks tonight, the House of Representatives is expected to pass a bill tomorrow and the Senate seems to be waiting for guidance.  The Fed is pulling out all the stops.  Meanwhile, next week’s meeting will almost certainly include a 0.50% to 0.75% rate cut (which will bring the Fed Funds rate back to near zero, where it sat from 2008 to 2015). They have increased overnight repo line assistance to a staggering $175 billion (note that a mere $50 billion was enough during last September’s volatility). Other tools could be deployed: a full on return to QE with the Fed buying Treasuries and Mortgage backed securities.  Treasuries: the 10 year hit an all time low of about 0.38% a few days ago.  Today it closed at 0.84%.  The yield increase usually means things are settling down, but in this case it’s “bad”.  Banks are selling Treasuries in order to hoard cash.  Lending: We are hearing the gamut of reactions.  Some lenders are shutting down originations temporarily, some fixed rate lenders are increasingly indicating an all in rate rather than a index and spread. Underwriting standards are being scaled back.  Anticipated slowdowns in consumer spending and business investment will have consequences for real estate. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Senior Bridge, Construction and Mezzanine/Preferred Equity Up to 90% LTV

    Hot Money

    March 11, 2020

    George Smith Partners is working with a national lender offering senior bridge, construction, and mezzanine/preferred equity programs ranging from $10,000,000 to $150,000,000 for all property types across the country. Pricing starts at L+250 for senior bridge loans and L+500 for mezzanine and preferred equity investments, with terms up to five years. On select stretch senior offerings, they can offer the borrower the option to convert a higher leverage, 60-85% LTC piece to preferred equity with up to eight years of duration.

  • Fed Is All In – well, almost – Lenders Struggle to Quantify and Price Risk as Indices Drop to Unprecedented Levels

    Pascale’s Perspective

    March 4, 2020

    Yesterday’s emergency 0.5% rate cut by the Fed was both expected and surprising. The cut was expected and it seemed sudden in its timing. Equity markets plummeted in a “buy the rumor, sell the news” scenario aka “we want the Fed to cut rates, oh my gosh, the Fed cut rates, things must be worse than we thought!” Also, investors remembered that the Fed does not have a vaccine, they cannot solve coronavirus with monetary policy! Since 1998, the Fed has announced emergency (non meeting) rate cuts 8 times (Russian debt crisis 1998, dot.com crash 2001, 9/11 2001, and during the financial crisis). Prime Rate is now 4.25%, 30 day LIBOR is 1.38, and the 30 year is 1.67%. LIBOR is expected to go to about 1.15% soon. The 10 year T hit an all time low of 0.92% yesterday. This prompted some banks to issue research papers asking, “could U.S. T rates go negative?” Capital Markets: The Agency lenders instituted floors, Fannie Mae floored the 10 year T at 1.30%, then floored again at 1.10%. 10 year agency loans are being priced at about 3.40-3.60% all in. CMBS: As one originator said, “We are in uncharted territory, everyone is watching everyone else.” Spreads for full leverage loans are anywhere from 220-275. All-in coupons 3.25-3.75%, although some low leverage loans are being quoted sub 3.00% all-in. Another originator commented, “Volatility is high, but I am quoting some all time low coupons.” Hotel loans are being closely scrutinized due to the concerns about the impact on coronavirus on travel. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Non-Recourse Land Financing

    Hot Money

    March 4, 2020

    George Smith Partners is working with a national lender providing non-recourse financing for properties in all phases of value creation from land through fully performing assets. Funding transactions from $20,000,000 to $75,000,000 this lender focuses on the top 25 markets in the U.S. With the ability to advance up to 85% of development value, pricing starts at L+550 – L+800 with terms up to three years and extension options available.

  • Bond Yields at All Time Lows on Worldwide Flight to Safety

    Pascale’s Perspective

    February 26, 2020

    The coronavirus is causing massive market volatility as the appetite for risky assets is plummeting. The 10 year T is at an all time low closing today at 1.32%. The 30 year is at 1.80%. This is in comparison to 30 day LIBOR at 1.61% (29.9 years of “curve” is 19 bps). This shows a market that is anticipating very low economic growth and inflation for the near future. The market may or may not be overreacting.  The absence of hard data and rampant speculation compounds to create massive uncertainty. The coming months will be telltale as the effects start to be measured in hard data and the spread rate becomes more apparent. We are seeing lenders institute fixed rate floors as risk spreads often widen with indexes plummeting. Some macroeconomic trends to be aware of are: (1) Coronavirus will have an immediate effect on the hospitality sector; (2) The 2020 Tokyo Olympics may be cancelled at a cost of $25B if there is no containment by May; (3) The Chinese economy is slowing and Q1 results of U.S. companies doing business in China will be affected; (4) 2020 GDP growth is expected to be 2.0%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Preferred Equity & Mezzanine Financing up to 90% LTV

    Hot Money

    February 26, 2020

    George Smith Partners is working with a nationwide capital provider for borrowers and sponsors seeking preferred equity and mezzanine financing to implement their business plans, including lease-ups, recapitalizations, construction completion on partially completed projects, basic and complex value-add strategies, transitional repositioning and stabilizing asset operations. Funding transactions from $3,000,000 to $25,000,000 this lender can structure behind Agency, CMBS and bank loans. With a focus on multifamily they can go up to 90% and can close in 40 days without an appraisal.

  • Bond Market Does Not Blink at Inflation, What is Wrong?

    Pascale’s Perspective

    February 19, 2020

    For many years, inflation has been the “boy who cried wolf”, sometimes glimpsed, but never fully materializing. Bond markets have been sensitive to inflationary data, often selling off when CPI, PPI or PCE data comes in “hotter” than expected. Today’s Producer Price Index was expected to rise 0.1% in January, instead it jumped 0.5%. Did the bond market sell off and yields jump 5-10 bps? No. The bond market brushed off the news and instead focused on Fed comments warning of uncertainty due to coronavirus. Now that China/U.S. trade tensions have eased (and China is engaging in massive stimulus), global growth was expected to soar in 2020. It seems we have traded one uncertainty for a more nebulous and unknown danger. 10 year Treasury yield rose 1 bsp to 1.56%.  Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Non-Recourse Construction Financing Rates Starting at 7%, Up to 95% LTV

    Hot Money

    February 19, 2020

    George Smith Partners is working with a national lender providing non-recourse construction financing for spec office, industrial and for-sale condo projects up to $100,000,000. Completion guarantees will still be required. With the ability to advance 95% of development value, pricing starts at 7% for terms up to three years. The lender can close quickly.

  • How Quality Sponsors Can Access High-Leverage Loans

    In the Press

    February 14, 2020

    Multifamily developers and investors enjoy favored status from high-leverage financiers, according to Zachary Streit of George Smith Partners.

    By Zachary Streit

    (published in MHN MULTI-HOUSING NEWS February 12, 2020 https://www.multihousingnews.com/post/how-quality-sponsors-can-access-high-leverage-loans)

    A healthy economy and a growing roster of capital providers looking for returns means high-leverage non-recourse financing is not only available, it’s a thriving subsector within the capital markets.

    After nearly vanishing during the recession and the early years of the recovery, demand from high-leverage finance providers for multifamily projects that include either ground-up development or transitional, value-added business plans is strong.

    Of late, deals we have solicited and closed have seen loan-to-cost ratios regularly hit or exceed 80 percent and have received multiple bids. These deals include both traditional multifamily and non-traditional deals, such as ground-up co-living requests and also single-family build-to-rent requests.

    For example, recent closings include an 80 percent loan-to-cost, non-recourse, cash-out bridge financing on a 200-unit multifamily property, and an 80 percent loan-to-cost, non-recourse, ground-up construction loan for a 270-unit student housing development with nearly 900 beds. Notably, both closings were in secondary, non-core markets.

    FAVORED CLASS STATUS
    Multifamily developers and investors enjoy favored class status from high leverage financiers due to the resiliency the asset class demonstrated throughout the past economic cycle and housing shortages in many markets nationwide.

    Typically, the multifamily deals attracting high leverage non-recourse financing are from entrepreneurial sponsors doing institutional-level deals. These are often mid-rise projects with equity partners that are either family offices or syndications, as opposed to institutional limited partners who will usually cap leverage at approximately 65 percent loan to cost.

    While high leverage loans carry more risk, they also offer more reward. Less equity is required, and the return on equity can be substantially higher as a result.

    The trade-off can also be seen through the prism of loan pricing. For full leverage requests of 80 percent or more, pricing ranges from 400 to 600 basis points over the one-month LIBOR rate, which is significantly cheaper than the cost of equity capital. For bridge loan deals at the same leverage ratio, spreads range from 250 to 350 basis points over the one-month LIBOR rate. While there is still a gap on non-recourse construction spreads vs. traditional recourse bank financing, the spreads on non-recourse bridge loans have compressed considerably and are often competitive with bank financings that could include some level of recourse.

    Variables that will affect pricing include leverage level, debt yield, the location and strength of the sponsor and the associated business plan.

    As with lower-leveraged loans, high-leveraged financing are secured by the property itself and the standard non-recourse guarantees (completion, carve-out and carry) generally apply. Sponsors should have an expert on their team who can verify there are no surprises in the loan terms. That expert can be a capital market advisor, who can also craft a marketing strategy that is likely to get the attention of multiple high leverage capital providers to ensure a competitive bidding process and also ensure a smooth and successful execution.

    DUE DILIGENCE REQUIREMENTS
    To best position a loan request, advisors will often recommend and facilitate a market study or appraisal, a clear description of the location and its demand drivers, a high-quality Excel model, a detailed representation of the sales and rent comparables and will need to provide information about the non-recourse guarantors’ track record and experience.

    When hiring a capital market advisor, make sure to ask about their experience with all of these details, the depth of their contacts and about their success rate.

    With the economy expected to remain strong and interest rates low for the foreseeable future, the outlook for securing high-leverage loans is good for quality sponsors. Assembling the right team to design and present the loan request is still essential, though.

    Also, ensure that your team keeps an eye on market threats that could affect consumer confidence and, therefore, capital markets. Currently, those threats could include the Coronavirus as well as trade tariffs and tensions.

  • Non-Recourse Bridge and Permanent Financing up to 95% LTC

    Hot Money

    February 12, 2020

    George Smith Partners is currently placing non-recourse stretch senior loans, subordinate debt, preferred equity, JV equity and stretch senior loans for all major property types nationwide. This Lender offers up to 95% LTC for stretch senior loans (min $60,000,000 total capitalization) and for preferred equity / JV equity (min $20,000,000) with terms ranging from two to ten years.

  • Treasury Yields Spike and Equities Rally on Old Data

    Pascale’s Perspective

    February 5, 2020

    Last Friday the 10 year closed at 1.50% just 14 bps above its all time low, as coronavirus fears spurred a flight to safety. This week’s upbeat data turned things around as “risk-on” returned. The ADP employment report was significantly more bullish than expected. Note that the manufacturing sector has been lagging in recent months while employment and consumer metrics have been bullish. After Monday’s ISM Manufacturing Index report and yesterday’s Factory Orders report exceeded expectations, markets really took off. The 10 year T jumped to 1.65%. Various unconfirmed reports of potential treatments emerging for the coronavirus added to the rally. However, note that these reports are based on pre-virus data and Asian supply chains are critical to that sector. So there is some caution as the effects and scope of the virus is yet to be quantified. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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