Challenge
School House Trust, the owner of Christiana Meadows, a 648-unit garden-style apartment complex in Bear, Delaware, found itself in a difficult situation. It needed to refinance $26 million of existing debt, consisting of $22.0 million low-floater bonds issued by the Delaware Economic Development Authority, plus a floating rate second mortgage of $4.4 million. The problem was that it was depending on the net cash flow made possible by these bonds to fund an ongoing unit-upgrade program. The trust assumed that its only options were to sacrifice net cash flow and lock in a fixed-rate loan or turn to a new LIBOR-based floating rate mortgage in hopes that rates would remain low. Neither option was very appealing.
Solution
Beech Street presented School House Trust with a third alternative—a Fannie Mae structured adjustable rate mortgage (ARM). The advantage of the Fannie Mae structured ARM was that it has one of the lowest initial pay rates of any floating-rate instrument available on the market. In this case, we locked in an initial pay rate of 2.36%. To enhance the amount of net cash flow generated by the property, we provided the borrower with four years of interest-only payments on the 10-year loan.
Providing a period of interest-only payments also enabled us to take advantage of a unique feature of the Fannie Mae structured ARM: amortization is based on the prevailing fixed rate at the time of spread lock, calculated from the end of the interest-only period. Because the imputed fixed rate—in this case 5.5%–is higher than the floating rate, the monthly amortization payments are less under the Fannie Mae structured ARM than a traditional floating-rate note.
“Our ability to find a vehicle that enabled School House Trust to refinance Christiana Meadows on terms similar to its existing loans is an example of the expertise that Beech Street brings to our relationship with every customer,” says Grace Huebscher, president and CEO of Beech Street. “This transaction also highlighted our flexible and resourceful approach to guiding the transaction through approval.”
