INSIDE THE DEAL: Johnson Capital Provides Interest-Only, Cash-Out Refi at 3.32%

By Keat Foong, Executive Editor Goleta, Calif.—Loans financed before the mid- to late-2000s are the ones that will be refinanced more easily because they have had time for adequate price appreciation, correct? In the case of Oasis Apartments, that is true. Kevin Burkhalter senior vice president at Johnson Capital’s Los Angeles office funded $10,500,000 in permanent financing for the privately held entity that owns the 125-unit garden-style apartment property.Johnson Capital also provided the refinancing at very favorable terms. Taking advantage of the currently low adjustable rates, the owner replaced the 8 percent interest on the former loan with a 3.32 percent, seven-year Adjustable Rate Mortgage (ARM). The Freddie Mac loan is interest-only for the first two years, and adjustable every month based on a spread over LIBOR. Additionally, the lifetime cap on the loan is 6.95 percent, a full percentage lower than the former fixed-rate interest rate. Freddie Mac typically embeds lifetime caps as part of the ARMs. “One of the stronger points of Freddie Mac is that it continues to be an interest-rate leader in adjustable rate, non-recourse, apartment loans,” asserts Burkhalter. Furthermore, cash-out was approved for the loan. What made possible the cash-out was that the building’s value had almost doubled compared to what it was in 1999 when the asset was first acquired. “A noticeable chunk of cash was pulled out,” says Burkhalter. “[The owner] made a good buy in 1999.” A moderate leverage and the strong submarket also helped obtain approval for both the cash-out and the interest-only features. It is now more difficult and also more expensive to obtain interest-only loans, says Burkhalter. However, the Loan to Value (LTV) ratio of not more than 65 percent made Johnson Capital as well as Freddie Mac “comfortable” with advancing an interest-only loan, he says.  Not to be missed, the property is located in the desirable Santa Barbara County South Coast market, considered a tier-1 market due to its significant barriers to entry. “The locality exhibits a slow to no-growth mentality which has helped keep vacancies low,” says Burkhalter. “It is hard for new competing projects to come on line. These underpinnings made Freddie Mac very comfortable offering those terms.” Burkhalter says his company knows the market very well. This is the fifth loan Burkhalter’s group has closed in the Santa Barbara area in just the past two years—with four different clients and the tenth with this same repeat client. Completed in 1964, the project is very well maintained and managed, notes Johnson Capital.