Better Deal Structure, Better Deal
Loan: $23,000,000
Property: Multi-family
Location: Arizona
Project: Construction Loan
Benefit to Borrower: $386,000 Over 2 years
Borrower Situation
It appears that only by spending $154,000 on an interest rate cap can the borrower ensure, to the satisfaction of both lender and equity partner, that it will meet the budgeted interest expense.
CIRM Solution
CIRM assists the borrower in subsequent negotiations. Our recommendations show persuasively that by implementing rate protection in stages over a defined period we eliminate the need for a cap and provide upside for considerable savings on interest expense.
The keystone is a participating swap, structured by CIRM, that fixes the interest rate on a majority of debt and caps the remaining debt.
Result
This structure not only keeps payments $250,000 below budget during the construction period. Additionally, it puts our client in the enviable position of benefiting regardless of whether LIBOR rises or falls.
Out-of-pocket expense: $18,000 – versus the lender’s proposed $154,000 cap.
Lesson: The most effective structures are invariably tailored to project characteristics, rely on the most up-to-date information, and proceed through a series of informed interest rate decisions over the term of the loan.
