Challenge
The challenge facing the owners of Canyon Crossing, a 440-unit apartment complex on the west side of Lubbock, Texas, was synchronizing the financing of the complex’s two phases. The loan on Phase I of 232 apartments was set to mature in February 2012. The loan on Phase II in 2015. In the best of all possible worlds, the solution would have been to consolidate the financing right now, but given the substantial prepayment penalty on the Phase II note, consolidation was hardly desirable. Working through Meridian Capital Group, the borrowers approached Beech Street looking for an instrument with maximum prepayment flexibility.
“We had worked with Beech Street on a number of transactions starting in 2010, and we were impressed with their knowledge of the agencies,” said Harry Bookey, one of the principals. “We felt confident that they would come up with a solution.”
Solution
Beech Street suggested Mr. Bookey and the other principal, Michael Rubin, consider the Fannie Mae ARM 7-6™ program. This variable-rate financing option with embedded caps includes an option to convert to a fixed-rate mortgage loan. The prepayment provisions are relatively liberal: one-year lock-out followed by a one percent prepayment premium thereafter.
The ARM 7-6 loan had another advantage for Bookey and Rubin—an extremely low interest rate. Although the rate floats over one-month LIBOR, the two borrowers were confident that the rates were not going to fluctuate much over the three years they intended to carry the loan.
Bookey and Rubin are experienced operators and know a good deal when they see one. They opted for the ARM. Beech Street rate-locked the deal 10 days after the commitment was issued and closed the next day. Currently, the rate is approximately 100 bps less than what they would have paid on a fixed-rate loan. The ARM has a maximum rate of 7.41 percent.
“Consolidating the loans was essential to us because we wanted to create a more marketable product,” says Rubin. “Thanks to Beech Street, that’s exactly what we’ll have in three years.”
