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5/09/16
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Continental Funding Group has arranged $11.5 mil in mini-perm debt refinancing for one retail and two office properties encompassing a combined 136.2k sf in Sacramento, on behalf of its client, a regional investment firm that specializes in acquiring and repositioning underperforming assets. The assets were acquired in three all-cash transactions, and the borrower was initially seeking bridge debt for the two office properties.
Continental’s J.M. Grimaldi secured the financing from an international bank. The five-year WSJ prime-based loan floats at one percent over the prime rate with a floor of 4.25 percent.
“Despite the wide availability of capital in today’s market, many lenders are exercising extreme caution when it comes to financing smaller deals, especially distressed assets in secondary markets,” explains Grimaldi. “While value-add investments offer a tremendous opportunity to generate returns, securing a lender that is willing to place debt on these types of assets is difficult and requires a significant degree of creativity.”
“The location of the properties presented an initial challenge,” he says. “Because Sacramento was hit harder in the economic downturn and has been slower to recover since, lenders have been hesitant to re-enter this market. Further, each office asset demonstrated high vacancy, as the owner’s value-add strategy has not yet been implemented.”
Continental Funding Group recommended pooling the two assets with a third property - a stabilized retail asset - in order to attract lenders to the transaction.
“By financing this as a portfolio, we were able to increase the blended occupancy and debt coverage ratio, leveraging the high-performing asset in order to achieve a total loan-to-value of 65 percent,” Grimaldi explains.
“In addition, by cross-collateralizing and pooling the assets into one loan, we were able to fund the project with mini-perm pricing as opposed to traditional bridge debt, which can be much more expensive,” adds Grimaldi.
The loan also incorporates an earn-out structure, enabling the borrower to obtain additional funds as new leases are signed. Initial funding was $8.03 mil, with the additional $3.47 mil available as leases close.
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