IMN Winter Forum 2012:  Laguna Beach, CA  January 18-20

Financial Compound to attend and participate in IMN’s Ninth Annual Winter Forum.  Financial Compound will speak on the panel entitled “Small Deal/ Non-Core Asset Financing:  What is Available and How to Secure the Capital”, scheduled for Thursday 1/29 at 3pm.  Financial Compound has significant experience financing this product type and will share insights regarding lenders that have their doors open to potential borrowers for small deals and/or non-core assets.  Commercial Mortgage Broker Financial Compound will explain the key underwriting components involved in non-core asset and tertiary market real estate financing, having closed in excess of $500 million of these types of transactions.

Financial Compound will also share its outlook on the private equity and debt commercial real estate capital markets.  With more capital providers coming to the market each month, 2012 is projected to be a great year for real estate financing and may continue to enjoy historically low borrowing costs.  We’ll be available during the conference to describe some of our transactions from 2011, including a hotel refinance on leased land with 13 years left on the ground lease, an $18 million loan with windows of flexible prepayment penalty for a two-tenant big box retail with one lease expiring in 2013, a $20 million credit facility to purchase single family tax liens, a 90% of all-in-cost lower income apartment acquisition financing with a blended rate between the senior and mez debt lender of 6.95%.

Commercial Mortage Lenders enjoy working Financial Compound.  Commercial mortgage broker Financial Compound, having closed in excess of $2.9 billion in financing transactions, enthusiastically serves the financing needs of the middle market, institutional sponsors, and fund managers.

Panelists include:

Jay Rollins, Managing Principal, JCR Capital
Greg Garrabrants, President and CEO, BOFI Federal Bank
Michael Schwartz, Financial Compound
Stephen Smith, President, Glenarbor Partners
Thomas Volker, Managing Partner, Kaplan Voelker Cunningham & Frank PLC
Jonathan Daniel, Managing Principal, Silo Financial

Financial Compound appreciates the business relationships it has developed from this IMN Winter Forum event, and looks forward to seeing you at this year’s conference.

For a portion of commercial mortgage broker Financial Compound’s business flow, we can be thought of as the Sanford and Son of the mortgage brokerage industry.  We finance many deals that others have left for trash and deemed unfinanceable, at a clip of approximately $100 million per year.   Applying a Keynsian multiplier to this volume of closing activity indicates that deals we fished out of the garbage can led to $2.5 billion of economic activity and jobs creation since the 2007 recession.  Financial Compound enjoys this work as an additional outlet for our creativity and perseverance.  We find these deals to be a nice balance with the more traditional and institutional deals we close with commercial mortgage lenders that comprise the majority of our business flow.

While many of our Sanford and Son deals are closed with soft and hard money lenders, occassionally an institional lender will close one of these dusty deals- and we call that a financial compound.

Commercial mortgage broker Financial Compound is please to present here the culmination of three years of its research into swap spreads. Swaps spreads are a measure of risk in the credit markets. The higher the swap spread, the bigger the credit risk in the market as perceived by market players. Its easier to understand how swap spreads are a proxy for risk if we start with a relatively simple example of how to gauge credit risk in the market. Credit risk can generally be viewed as the difference between the 90 day T-bill and the 90 day libor. The t bill is considered to be the risk free rate. Libor is the bank overnight borrowing rate, and has credit risk built into it- the risk that the bank will not repay the overnight loan to the other bank who lent the money. If one looks at the spread between these rates, it has run around 50 basis points historically. It got up over 100 bps during the 1987 stock market crash, the Long Term Capital market crash in 1998, and the subprime credit crunch in 2007. Many Commercial Mortgage Lenders use swap rates and swap spreads to price their commercial mortgage products.

Now lets turn back to swap spreads. The 10 year swap spread is the difference between the 10 year swap rate and the 10 year Treasury. And the 10 year swap rate is the fixed rate on a Libor-based interest rate swap.  For example, if the 10 year treasury was 4.0% and the 10 year swap rate was 5.0%, then the 10 year swap spread is 100 basis points. The 10 year treasury is considered the risk free rate. The 10 year swap rate includes a premium for the credit risk that the swap counterparty will not make its payments. Historically the swap spread has ranged around 55 basis points. At the height of credit crunches it has gotten up to around 125 bps.

The swap rate is what the swap market charges someone to swap from floating to fixed rate. The fixed swap rate is swapped with a 90 day or 180 day libor floating rate, and is called a vanilla interest rate swap. The swap market has a lot of liquidity. Therefore the swap spread can also be understood as the market’s understanding of expected future libor rates. When swap spreads go up, it tells us that the market thinks libor rates are going up.  However, swap rates are also determined by supply and demand factors (i.e. the supply and demand in the market to borrow funds) as well as numerous other market conditions.

Furthermore, recently with the financial crises in 2011 the market has panicked and investors shy away from credit spread products and had a flight to liquidity. Many investors are keeping their money on deposit at the banks. So banks don’t need to borrower overnight and some economists argue that libor, and swap spreads are artificially low as a result because the low rate is a product of the low demand for this overnight borrowing.  So that if we rely on swap spreads to determine risk based yields, we may be fooling ourselves. Some market observers have looked to other types of spreads to gauge the credit risk in the markets. In a 7/15/2011 Wall Street Journal article called “Key Credit Guage Loses Clout” Gary Jenkins, head of fixed-income research at Evolution Securities in London prefers to track the spread between the 10 year Treasury, and the 10 year debt sold by Greece, Portugal, and Spain to guage credit risk than swap spreads in the current environment.

Commercial Mortgage Lenders approve a Discounted Payoff for special use property in Nevada

Commercial mortgage broker Financial Compound, on behalf of a long-standing client, arranged for a $1 million reduction in prepayment penalty so that our client could more easily sell a special use property.  This special use property was encumbered by an approximate $11 million first mortgage loan.  Financial Compound worked with the borrower’s Commercial Mortgage Lenders to facilitate this discounted payoff, providing underwriting and market support for the borrower’s request.  The process resulted in a transaction that accomplished both the borrower’s and Commercial Mortgage Lenders goals.

This lender enjoyed a large exposure to the property type and in 2009 decided that it no longer wanted to have such a large exposure.  Therefore the lender was willing to entertain our discounted payoff request and still earn a strong enough yield on the investment to make the lender happy.  The transaction represents a good example of Commercial Mortgage Broker Financial Compound’s ability to find a common ground between the borrower and the lender, as facilitated and augmented by Financial Compound demonstrating market rates terms and underwriting to help both parties better understand the financial and economic dynamics of the transaction.

Financial Compound, based in Santa Monica, CA, has started to interview candidates to fill two available financial analyst positions.  Candidates should possess strong analytical skills and a desire to forge a career in commercial real estate finance.  The analyst position involves underwriting, packaging, placing, and closing commercial real estate mortgages and equity financings.  Commercial Mortgage Broker Financial Compound remains an innovator in identifying and structuring capital markets opportunities and as a result provides an unmatched real estate credit training program.

Prior to 2003 Financial Compound sought staffmembers with MBA and law degrees in finance or economics.  By 2005; however, Financial Compound had a paradigm shift with respect to its hiring practices and started to lean towards college graduates with majors in liberal arts.  Financial Compound had better success in training these folks in from scratch, as opposed to analysts with work or educational experience in the field who may have develop less than stellar habbits.  Financial Compound prides itself on its training methodology and materials and prefers an ‘open canvass’ to start working with.  More recently Financial Compound entertained some high school graduates who liked to read alot, and found these candidates also had the ability to perform well.  The key ingredient for success at Financial Compound is hard work and persistence.  For certain transactions we speak to more than 100 lenders and it is important for our analysts to embrace our philosophy of brushing off rejection and continuing to look for a lender who is a perfect fit for the transaction.  Post graduate candidates that Financial Compound interacts with may not always be scrappy enough to succeed in our ‘in the trenches’ forum.  Michael Schwartz of Financial Compound notes that “2011 has been one of our best years in history.  I know that we got lucky but at the same time, when you work hard enough, you create your own luck.”

Prospective analysts can contact 310-260-5900 x103 regarding the position.

Commercial mortgage broker Financial Compound has arranged has arranged a $1 million refinance for a 1950’s built multifamily property.  The class-B property consists of a 2-story, 20-unit building plus 5 free standing cottages.  The borrower desired a few customized features in the loan making the loan unsuitable for agency or securitization lenders, including special provisions related to non-monetary defaults and borrower’s cure rights.  As a result, Financial Compound directed this transaction to portfolio commercial mortgage lenders.  Loan terms included   (1) Rate: 12 MAT + 2.70% (Floor: 2.70%, Cap: 8.96%); (2) Term/Amort: 30/30; (5) Non-recourse; (6) Lender Fee: Par; (7) Prepayment: By year–3.0%, 2.8%; 1.6%, 0.4%, 0.2%, then open to prepay.  Borrower may convert to fixed at then-prevailing rates.

This transaction represents another commercial mortgage broker Financial Compound deal for a repeat client where Financial Compound was able to work with commercial mortgage lenders to customize the transaction according to the borrower’s specifications.  Many of our deals are for repeat clients who do all of their real estate financing through us.  Most of our marketing has been through word of mouth referrels.

Presented by the California Mortgage Bankers Association, this conference boasts the largest gathering of western states commercial real estate lenders.  Financial Compound looks forward to seeing you on Thursday October 6 at 1:45pm at the panel entitled, “A Behind-the-Scenes Look at Insurance Company Lending” in Encore Ballroom 5.  Panelists include:

Don Dibble, Lincoln Financial Group

Bill McPadden, John Hancock Real Estate Finance

Timothy McGinnis, New York Life Investment Management

Greg Michaud, ING Investment Management

Colin Elder, Symetra Financial

Commercial Mortgage Broker Financial Compound works closely with many of these life companies and successfully closes loans with life company and other portfolio lenders, as well as with other types of capital providers throughout the real estate capital markets.  As we round out 2011 Financial Compound continues to have a banner year, with a loan closing volume approaching its 2006/2007 peak.  Financial Compound does not attribute its 2011 success to economic trends, rather the luck and opportunity of adding a handful of new clients and staff-members, in addition to performing refinances and other loans for its core of repeat borrowers.  Commercial mortgage broker Financial Compound notes that a number of distressed deals that have been in workout mode for more than 18 months have come to conclusion in 2011 involving workouts to continue on with the same capital providers, or distressed refinances where Financial Compound was able to find the proverbial needle in the haystack and bring new money to the table for properties where many of today’s commercial real estate lender will not transact.

We look forward to seeing our friends and colleagues at the 14th annual Western States CREF conference, in addition to making new connections.

Financial Compound arranges a $20 million distressed single family credit acquisition facility.  Loan terms include 90% of cost (LTC), 6% interest rate, 3 year term, interest only, recourse, 1% lender fee.  While many similar transactions are closed with hard money lenders and lower leverage, for strong sponsors with a good track record, Financial Compound is able to arrange higher LTCs and institutional pricing with a handful of commercial mortgage lenders.

Commercial Mortgage Broker Financial Compound is available to assist sponsors that purchase single family properties at the foreclosure sales.  We work with lenders that will fund the transaction at the time of sale (at the courthouse steps), as well as within days and a couple of weeks thereafter.  The homes can be pre-approved for loan dollars prior to the time of the foreclosure sale.

Financial Compound has arranged a $23 million unentitled land refinance for a 5,000 acre land assemblage in a southern California coastal plain.  The assemblage is to be developed into a  low density exclusive community with a few thousand acres of private preserve, signature golf course, club-house, spa and equestrian facility.  This refinance pays off the existing recourse debt, returns $5 million of costs to the borrower that has been spent on the site to-date, and funds all remaining entitlement costs necessary to obtain ‘paper-entitled lot’ status.  Land loans terms include a 12% interest rate, 5 year term, interest-only, non-recourse, no prepayment penalty.

Commercial mortgage broker Financial Compound was instrumental in helping the borrower find this capital provider, in a marketplace where un-entitled land financing is rare.  Financial Compound has closed more than 15,000 acres of un-entitled land financing with this particular capital provider.

Financial Compound has been able to procure $7 million of institutional refinance proceeds for this Kmart (on a short term lease) anchored neighborhood retail center in the Midwest.  The center was originally anchored by 4 big-box tenants all of whom suffered chainwide bankruptcies.  This left the borrower a 220,000 sf center occupied only by Kmart.  The borrower filled in the vacant spaces to 75% occupancy with smaller tenants, changing the dynamic to a multi-tenant center with primarily short term tenant leases.  Kmart store sales at this location are decent, although nothing to write home about.  Not many commercial mortgage lenders were interested in this transaction, although Financial Compound was able to identify one commercial mortgage lender to close the deal.  Loan terms included 98% of all-in-cost (including refinance proceeds, TI and leasing reserves), 9.15% interest rate, 1.45 DCR, 3 years interest-only, with two 12 month extension options, non-recourse, 2% lender fee, prepay penalty 2% in first year.

Commercial mortgage broker Financial Compound canvassed more than 150 lenders over a two year period to locate this lender who viewed the transaction as positively as us.  In general, the capital markets shy away from tertiary markets, and Kmart anchored centers.  However, with a closer look at this transaction Financial Compound helped the lender to notice the superlative aspects of this transaction.