Banks Increase Interest Reserve Requirements

Existing construction and bridge loans are burning through allotted interest reserves according to several portfolio lenders surveyed. Interest rates exceeded underwritten projections. Other non-rate related reasons vary depending on the property type and geographical location. Developers and reposition investors have taken more time than initially allotted to execute their respective business plans. Several mini-storage projects have been adversely impacted by the housing crisis, retail has been negatively affected by the cost of oil and other durable goods, and office construction has taken a turn due to layoffs that have resulted from ongoing corporate downsizing.

Construction and bridge financings are abundant but in order to mitigate leasing risks, lenders are allocating larger interest reserves and requiring pre-leasing of properties. Construction financing for quality single tenant properties is still obtainable as high as 90% of cost not to exceed 75% of value. Fifty percent pre-leased retail, office, and industrial developers can expect to see 80% of cost, not to exceed 75% of value. Hospitality is 65% loan to cost and 70% loan to value. The good news for borrowers is that Libor and Prime continue to tumble. Most bridge loans are priced above Libor or Prime with rates today in the 5.75% to 7.25% range. Historically, these are very attractive rates for construction and rehabilitation projects. Interest rates may continue to compress as the Fed lowered the Fed Funds Rate another half percent this week.

We will keep you posted…

Penstar recently obtained a loan application for the acquisition of a 54,000 square foot owner/user office building located in Southern California. The current tenant is a subsidiary of an international company who acquired the business and shortly thereafter purchased the real estate. The global parent will serve as the lease guarantor with the local subsidiary acting as the lessee. The loan is fixed for 5 years at an interest rate of 6.50%, with a 30-year amortization and a 10-year term. There is no “warm-body” guarantor on the lease or the loan. The loan will reset at the end of 5 years at the then prevailing rate plus the indicated spread. To discuss, please contact David Stepanchak at (818) 883-9611 or DStep@PenstarAdvisors.com.

Hot Money
Ground Lease Program

Penstar is currently working with a private equity fund with $2.8 billion to invest between now and 2009. They specialize in acquiring land under existing cash-flowing buildings and executing long term ground leases. Our client purchases the land at extremely low cap rates (ranging from 3% to 5%) with the asset bifurcated into fee and leasehold estates. Our client then leases the ground back to the owner for 99 years. The purchase price of the land typically represents 30% to 35% of the total acquisition cost at a cap rate of 150 to 200 basis points less than the overall acquisition cap rate.

This program can also be used to take out existing ground leases and recapitalize leasehold entities. The fund is seeking office, hotel, retail, multi-family, and industrial properties nationwide in major MSA’s from $50 million to portfolios of $700 million. This program offers various advantages to developers, including higher cash on cash returns, increased loan proceeds on a ground lease, recapitalization or high leveraged acquisition, and tax deductions due to the deductions for ground lease payments. The fund will allow for a repurchase option within the borrowers’ respective lease term. To discuss, please contact Steven Hamermesh at (818) 883-9609 or Hamer@PenstarAdvisors.com.

30 Day Libor	10-Year Treasury	Prime
3.14%	3.59%	6.00%