Western Real Estate Business

JUN 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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40 • June 2018 • Western Real Estate Business www.REBusinessOnline.com are apparent, but it will take a flexible lender who is willing to be a first mover. The lender's last dollar basis and the borrower's ability to effectuate an exit will be the driving factors for obtain- ing attractive financing during these early stages of micro-unit expansion. This is particularly true in locations where the con- cept is not proven, including Los Angeles. Many market participants are wary of a potential peak and subsequent correction in the real estate market as prices have been on a steady rise since the Great Recession. Lenders are even more sensitive to a decline as they attempt to protect their position and avoid taking equity risk at debt returns. With attrac- tively priced transactions hard to come by, forward-looking de- velopers have opportunities to change the landscape in certain asset classes, including both tra- ditional and out-of-the-box al- ternative assets. As the future of these projects, specifically food halls, retail repositions and mi- cro-units, becomes clearer, lend- ers may become more aggres- sive in pursuing these financings with quality, experienced bor- rowers. Floating-rate debt offered by banks for ground-up construction was very attrac- tive in the recent past. With the increase to LIBOR, rising interest rates and the fear of unpredictability in the capital markets, how- ever, borrowers are more attracted to longer- term debt construction financing with fixed rates at funding for the entire loan term. Construction to perm financing and takeout financing upon completion of construction — prior to stabilization with life insurance companies — is becoming more popular. Life companies have experienced a high demand for their products through the first half of 2018. This demand is ex- pected to continue through the end of the year and beyond. Life companies offer attractive fixed-rate terms from five to 30 years that can exceed the construction period. Having takeout financing available at the beginning of the loan process pro- vides peace of mind to borrowers. These loans are assumable, and the borrower is able to increase loan amounts during the term of the loan without having to pay off the original loan. These top-offs or add-ons are done by amending the original loan documents and blending the new rate with the old rate. This has helped mitigate heavy pre-payment penalty struc- tures, including partially locked periods, yield maintenance and/or step downs. Other benefits include limited to no post- closing covenants after stabilization, no minimum occupancy requirements, no impounds or reserves and no minimum net worth covenants. Some borrowers maintain a few misconceptions about life company loans. A few falsely believe that the only way to re- ceive higher proceeds is to obtain a new loan upon stabiliza- tion, or that life companies only lend on Class A and large-scale projects. Life companies are normally more conservative than other lenders when it comes to construction to permanent loans. Thus, a borrower should understand that they can re- ceive more proceeds in the long-term once a property has per- formed and increased its NOI. Smaller-scale projects can get funding beginning at $10 million for multifamily in both pri- mary and secondary markets. If you want permanent financing at construction completion prior to stabilization, that is possible with life company loans. This cannot be accomplished with traditional permanent fi- nancing such as bank, CMBS or agency financing. Joint venture and preferred equity for ground-up projects is readily available — and permanent financing after stabilization is readily avail- able — however, permanent financing prior to stabilization is only available through life companies. This type of financing is in demand by developers now that we are in a rising inter- est rate environment. Life companies also provide structured, high-leverage participating loans from 85 percent to 95 percent LTC for well-located projects with experienced developers. A client wanted to refinance a construction loan for a newly built, vacant, 54-unit multifamily project in Sherman Oaks, Ca- lif. I proposed a 10-year loan from a life company. The client originally was not interested in a life company loan due to the pre-payment structure with yield maintenance, in addition to his uncertainty about owning the asset for the long-term. I ex- plained to the client that this loan would become part of the marketability of the property. I demonstrated to the client that the loan was assumable and that a new buyer would appreci- ate the low fixed rate, in addition to potentially increasing pro- ceeds in the future if the property exceeds projections. Chasing interest rates is always a gamble. Consider locking in a long-term rate and allow yourself to focus on your next project. interfaceconferencegroup.com/nl2018 If you are involved in retail NNN investment, development, financing, sale leaseback or 1031 transactions, you need to be at InterFace Net Lease! Alicia Turlington 404-832-8262 aturlington@francemediainc.com REGISTRATION & GENERAL INFORMATION: Rich Kelley 914-468-0818 rkelley@francemediainc.com SPONSORSHIP & SPEAKING INFORMATION: Scott France 404-832-8262 scott@francemediainc.com Shopping Center Business and Northeast Real Estate Business magazines are pleased to host the 9th annual InterFace Net Lease conference on October 3rd in New York City. This one-day event will attract leading players in the net lease, 1031 and sale leaseback markets. October 3 rd » New York City InterFace NET LEASE 9 th Annual InterFace Conference Group ® A division of France Media, Inc. Hachem THE POPULARITY OF LIFE COMPANY CONSTRUCTION TO PERMANENT, TAKEOUT FINANCING By Antonio Hachem, Principal, George Smith Partners in Los Angeles

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