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LONG BEACH, CA-The owners of three apartment complexes in Los Angeles and Orange counties have refinanced the properties for $19.86 million two years before their loans were due to mature and have taken cash out despite a prepayment penalty of more than $1 million. Rick Padilla, a senior director in the Long Beach office of Marcus & Millichap Capital Corp. who arranged the pool of three loans, tells GlobeSt.com that the borrowers were able to take out substantial cash and obtain favorable terms despite the locations of the assets in softening markets with declining occupancy and rental rates.

The borrowers, all private investors, were part of an LLC that owns the complexes, all of which were built in 1973-1974. The refinancings were all fixed-rate, 10-year Fannie Mae loans that amortize over 30 years. They included $7.02 million at 5.57% for the 100-unit Magnolia Apartments at 1020 N. Magnolia Ave. in Anaheim, $5.94 million at 5.81% for the 116-unit Gramercy Apartments at 1727 W. Glenoaks Ave. and 1724 W. Catalpa Ave. in Anaheim and $6.9 million at 5.83% for the 200-unit Racquet Club Apartments at 44045 W. 15th St. in West Lancaster. The loan-to-value ratio was 65% for the Magnolia Apartments and 60% for the other two.

Padilla says that the borrowers were willing to pay the prepayment penalty because they believe that interest rates could be significantly higher in two years when their previous loans were due to mature, there might not be money for cash out in two years and property values might drop by then. “They felt that it was better to pay the penalty now and lock in these very favorable rates,” he says. “They still have good cash flow and plenty of equity in the deal.”

Padilla explains that MMCC navigated through a number of obstacles in arranging the loans, all of which were with Fannie Mae. One obstacle was that vacancy was increasing at the Lancaster complex, where rents were above market when MMCC began the loan application process.

Padilla says MMCC advised the borrower to lower the rents and introduce concessions at the complex, which boosted occupancy to nearly 97% by the time the loan closed. “We were able to demonstrate to the lender that the only reason for the high vacancy level was the high rent, and when the owner dropped the rents, the occupancy went up,” he says.

Another obstacle was that Magnolia Apartments in Anaheim is student housing, which is a challenge to finance in today’s market because lenders view student housing as seasonal and less reliable than standard multifamily properties, Padilla notes. He explains that lenders tend to raise the rates, lower the loan-to-value ratio and limit cash-out proceeds on student housing, which is why the LTV was 5% higher on the Magnolia loan than on the other two.

One of the biggest keys to obtaining the favorable interest rates was timing, according to Padilla. He explains that interest rates were volatile during the loan application process, rising and falling all the time. “A week before we locked, the rates were 30 basis points higher, and when the rates came down, it saved them (the borrowers) $913,000 over a 10-year period,” he points out.

The key to timing the lock for a favorable rate is “having all of the documentation ready to go so that you can get to the approval stage and lock when rates are favorable,” Padilla tells GlobeSt.com. He notes that MMCC was in competition with a couple of shops and the borrowers were also talking directly to other lenders. However, the borrowers wanted the longest-term fixed loans possible, so the GSE loans offered the best terms, he says.

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