Apartment Owner Cuts Capital Costs

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LOS ANGELES-The owner of three apartment complexes in West Hollywood and Sherman Oaks has reduced his cost of capital by 250 basis points and has switched from a floating to a fixed-rate loan with $28.51 million in refinancing, according to Highland Realty Capital. Mike Guterman of HRC’s Los Angeles office tells GlobeSt.com that the borrower, Shuster Properties, sought the refinancing after “struggling with negative cash flow due to the significant increase in floating rate debt over the past year and a half.”

Guterman explains that the two properties are value-added plays in which Schuster is achieving higher rents after rehabbing the two complexes. However, he adds, “”The properties are still in transition and did not the have the cash flow to support a CMBS permanent loan.”

In lieu of a CMBS loan, Highland arranged the financing through a portfolio lender to underwrite a fixed-rate loan at a one-to-one debt service coverage. The loans also included additional funds for lease buyouts and interior renovations as the units roll over.

The West Hollywood property is a 56-unit complex called Terraces at the Grove at 110 S. Sweetzer Ave., at First and Sweetzer near the Grove shopping center. The two Sherman Oaks properties are the 84-unit Toscana Apartments at 5412-5424 Sepulveda Blvd. and a 50-unit property at 14556 Magnolia Ave.

Highland also arranged nearly $14.47 million in financing for the $16.6 million acquisition of the 142-unit Alder Creek apartment complex at Canyon Crest and Watkins drives, near the University of California in Riverside. The property was acquired by Chesapeake Real Estate Value Investors, which is managed by Legg Mason Real Estate Investors Inc.

The 80% loan-to-cost financing included approximately $1 million renovation capital. The initial funding was structured as a five-year fixed rate loan and the additional fundings will be set to Libor.

Highland could have arranged proceeds higher than 80% loan to cost on a floating rate basis, but the cost of capital from the fixed rate markets are at least 100 basis points lower. “It made sense for the client to invest more equity, improve the capital stack and remove the interest rate risk,”Guterman says.