Summary: Continental Partners arranged a $12,780,000 non-recourse loan to finance a multifamily property in Redwood City, CA. The Sponsor is a professional real estate investor specializing in ‘value-add’ opportunities with over 10 years of experience. The Sponsor identified a multi-family, value-add opportunity with below market rents. The total project cost is $16,500,000. The bridge loan was sized to 85% of purchase price and 78% of cost, which included an interest reserve and renovation costs. The Sponsor is planning to invest nearly $1,100,000 to renovate this project to achieve their targeted market rents and stabilize the property. This structure provided maximum flexibility for the Sponsor to utilize equity they had on hand to improve their IRR, while also providing the bank control of the renovation releases. The 3 year loan was priced at 30-day LIBOR + 515 and had a 12 month prepayment penalty. The borrower is able to pay off the loan after 12 months without penalty.
Opportunity: Continental Partners was aware the Sponsor would only consider a bridge loan without any personal guarantees. Most Lenders were having a tough time getting to initial proceeds as the debt yield was below 6% because of the low cap rate going in. Continental Partners prepared a proforma looking out to 36 months with a detailed renovation budget of approximately $1,100,000 ($22,000 per unit). Continental Partners also provided a number of rental comps to justify the higher rents and proved to the Lender that once the business plan is executed the Sponsor would be able to refinance the existing bridge loan.
Result: Continental Partners found a correspondent Lender to provide a bridge loan facility. This Lender was able to structure an interest reserve to cover the debt service shortfall and allowed for future advances for renovations costs, with the commitment based on the prospective stabilized value. The Lender also agreed to fund the renovation reserve with invoices instead of having the Sponsor send cancelled checks to prove payment. Based on a thorough understanding of the Sponsor’s business plan, as well as market research, the Lender was able commit to a larger loan amount than originally requested; allowing the Sponsor to put in less equity and increase the projected levered IRR. The Sponsor plans to completely rebrand the property by performing extensive renovations to the interior and exterior including the installation of new vinyl wood plank flooring, modern cabinetry, quartz countertops, new kitchen appliances, and tonal painting. In addition, the Sponsor plans to implement a completely new design to the entryway, revitalize the hallways and create a tenant lounge to build a sense of community for residents, particularly catering to young working professionals.