Continental Funding Group Secures $12M in Sacramento
Continental Funding Group, Los Angeles, secured $11.5 million in mini-perm debt refinancing for one retail and two office properties in Sacramento, Calif.
Continental Executive Vice President J.M. Grimaldi arranged the financing for a regional investment firm that specializes in acquiring and repositioning underperforming assets.
“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,” Grimaldi said. “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 requires creativity.”
The sponsor acquired the assets in three all-cash transactions and initially sought bridge debt for the two office properties, Grimaldi said. “The location of the properties presented an initial challenge,” he said. “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 recommended that the sponsor pool the two distressed office assets with a third property–a stabilized retail asset–to attract lenders to the transaction. The portfolio encompasses 136,000 square feet.
“By financing this as a portfolio, we were able to increase the blended occupancy and debt coverage ratio, leveraging the high-performing asset to achieve a total loan-to-value of 65 percent,” Grimaldi said. “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.”
Continental also incorporated an earn-out structure into the loan’s provisions, which enabled the borrower to obtain additional funds as new leases are signed. The initial funding equaled $8.03 million, with an additional $3.47 million available as leases close.
“Incorporating an earn-out structure allowed us to boost lender confidence while simultaneously lowering the sponsor’s costs,” Grimaldi said. “By structuring release provisions into the loan we also ensured flexibility for the sponsor, who can sell off assets individually while the loan continues to be resized to the pro rata share of the remaining collateral.”
An international bank supplied the five-year loan, which floats at 1 percent over the WSJ prime rate with a floor of 4.25 percent.
