FINFacts July 27, 2011

Volume XIX  |  No. 28  |  July 27, 2011

Letter to the Editor

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KEY RATE INDICES Prime Rate  3.25% 1 Month LIBOR  0.19% 5 Yr US Treasury  1.56% 5 Yr Swaps  1.83% 12-MAT  0.25% 3 Month LIBOR  0.25% 10 Yr US Treasury  2.98% 10 Yr Swaps  3.07% 11th Dist COFI  1.36% 6 Month LIBOR  0.42% 30 Yr US Treasury  4.29%

Transaction of the Week Transaction Description: $9,500,000 Acquisition/DPO for Multifamily in Northern California The Sponsor required an acquisition loan to finance the discounted pay-off (DPO) of a 96-unit apartment complex in Northern California. While the property historically operated at above 95% occupancy, cash flow suffered due to a condo conversion play that stalled in mid-2010. Challenge: The in-place NOI did not justify the required loan proceeds. Additionally, the prior operator was a condo converter and not experienced in managing rental units. Lastly, the DPO had to close by a fixed date. Solution: Based on GSP's counsel, the limited partner, an experienced multifamily owner and operator, replaced the prior operator and brought in an experienced management company to run the property. GSP then analyzed the historical operating expenses to cull-out non-recurring and capital expenditures that were attributable to the prior operator's focus on condo sales instead of traditional multi-family operations. Given the hard close date required by the lender, GSP recommended a regional bank with proven execution ability. GSP then worked with the lender to explain all the historical variances and closed the transaction on-time and as-applied for. Amount: $9,500,000 Rate: Libor + 250 bps Fixed: Yes Term: 3 Years + 1 + 1 Amort: IO for first two years, 30-year thereafter LTV: 70% DSCR: 1.20 Non-Recourse Lender Fee: 0.75% Brokers: Gary E. Mozer, Steven Orchard, Josh Roseman, Michelle Lee Hot Money National Reposition Bridge & Construction Mezz Lender Funds Below Break Even DCR Starting at 7% A national capital provider is actively funding asset reposition and value-add bridge loans for multifamily, anchored retail, office, industrial, and medical office properties to 90% LTC/80% LTV. The two year non-recourse loans are priced at 7% and sized from $10,000,000 to $50,000,000. Secondary and some tertiary markets will be considered. The capital provider will fund interest reserves and advance below a 1.0 DCR. This lender is also offering ground-up construction mezz-debt from $5,000,000 for multifamily properties up to 85% LTC priced at 10%. Hot Money National Life Insurance Company Debt Financing to $125,000,000 A national life insurance company is aggressively funding moderate leveraged Class A multifamily and commercial assets between $8,000,000 and $125,000,000 to 65% LTV. The multifamily loans are priced at T+140 fixed for 10 years. Commercial spreads are 25 bpts wider. All loans are rate locked at application, and offer 30 year amortization on a 30/360 basis. Forward commitments are available up to 12 months prior to funding. Lower leveraged transactions may qualify for 5 years of interest-only before amortizing over 30 years for the balance of the term. 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. Steve Bram Speaks at Real Estate Panel Last Thursday, founding partner Steve Bram spoke at the Southern California Real Estate Appraisers panel at the Ronald Reagan Library in Simi Valley.  Fellow speakers Greg Harris, Kevin Shannon, and Richard Pink made various commercial real estate market evaluations and projections.   Greg Harris of Marcus and Millichap highlighted vacancy caps across southern California; 3% vacancy in Ventura County, 4% in Los Angeles County, and 5% in Orange County.  Institutional investors currently underwrite Class A properties at a 4% initial cap, 5% exit cap, and leveraged and unleveraged IRRs at 9-10% and 8%, respectively.  Current underwriting consensus calls for a 7% annual rent growth.  Private investors are debt dependent, buying at 4.75-5% for class A, 5-6% for Class B, and 6%+ for Class C.   Kevin Shannon of CBRE classified office buyers as 70-80% foreign investors.  A shortage of core product has led buyers to more value-add properties.  He said that CBRE recently sold spec office land for small buildings at $115 psf in Playa Vista.  A major Glendale based Pension Fund Advisor bought Class A office product in Denver at a 5.5% cap rate. Kevin sold a large office property in Seattle, with 12 months rent support for rolling leases, at a 5.0% cap.  Investors are flipping Orange County assets purchased last year at deep discounts.  Entitled office land is selling for $23 psf and un-entitled office land is trading once again.   Richard Pink of ING Clarion referred to real estate as "the new gold".  Core is being built/bought to a 5% ROC, and apartment rents have increased from $2.25 to $2.90 in some areas.  Pension funds have $30 billion to invest, and are actively seeking deals armed with total investment capital of $100B. Capital is now advancing to second tier locations (Las Vegas, Phoenix, Boise) due to the lack of transactions in primary markets. Most advisors will now do Joint Ventures, building to core ROC's.  Industrial and apartments are very strong in the Inland Empire, with 5.5-6.0% ROC today on untrended rents.  Investors will buy core at 6.5% assuming a 10 year hold, and will live with an 8% IRR.  German, British, and Asian investors want long term assets and are not concerned with rollover in 10 years.  Pension funds do not want to sell because they cannot find places to reinvest.   The lack of core product in the market is leading investors to new pastures. Pascale's Perspective Debt Ceiling….What's the score?  It looks like there are dueling plans that may be reconciled into a grand compromise.  The main concern among investors is not default, but downgrade.  Therefore, it's the credit agencies that may decide the health of our economy and credit markets.  The Congressional Budget Office (CBO) score is key as that is a non-partisan "grade" as to the effect of the spending cuts being proposed.  Worldwide investors (China, Japan, Saudi Arabia) are concerned about the USA's growing deficit and what's being done to control borrowing.  Therefore, the amount of deficit reduction must be substantial for the rating agencies to preserve the United States' AAA credit rating.  The Market showed concern today as the Dow dropped 200 points…stay tuned  David R. Pascale, Jr.

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©2011 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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