High Leverage The Norm in this Market

LOS ANGELES—Massie Capital and Glenn & Shannon Dellimore have secured financing for the acquisition and renovation of the Gershwin Apartments. The borrower set out looking for high leverage, and was able to secure 85% loan-to-cost and 80% loan-to-value funding and still saw competition for the deal. According to Shahin Yazdi, a principal at George Smith Partners, who secured the funds on behalf of the borrower, the high leverage is indicative of where we are in the market—but lenders aren't ignoring fundamentals.

“We are in a very strong market. I think this is indicative of where we are in the cycle, but I don't think lenders are too aggressive either,” Yazdi tells GlobeSt.com. “There are a lot of fundamentals to this deal that made sense. We didn't underwrite for rents that we couldn't support in today's market. So, even at this high leverage, there is income in place that supports it. Plus, this loan should be at a low LTV relative to where they are going to end it.”

The terms of the deal were not disclosed, but Yazdi did tell GlobeSt.com that the borrower secured a $20.9 million loan, and purchased the property for $25 million. The Gershwin Apartments has 163 apartment units and 10,500 square feet of ground-floor retail space. It was originally built in 1927, and recently renovated by the former owner, CIM Group. “The borrower wanted max leverage, and he wanted non-recourse,” says Yazdi. “He felt that having a bridge loan for something like this was perfect. He has big plans for the property, including improving the common areas and the units. Then, he will get a permanent loan on the property once the improvements are completed. He felt like there was a lot of room in the income to be able to do that.”

The buyers plan to hold the property for the long term, although Yazdi said that the hold period didn't affect the leverage. Overall, there was a good amount of competition for the deal. “We got a good amount of feedback from lenders. There were some challenges because the property had just been renovated and some lenders had a hard time understanding how he was going to renovate it further or if the income could really grow anymore,” he says. “A lot of lenders, though, really liked it and made strong bids. Once you get above $10 million, most lenders are okay at high leverage. It is almost like cheap equity.”