$54M Loan Follows Rare 27-Month Rate Lock

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LOS ANGELES-The owner of three Southern California warehouses totaling 934,000 sf has a $54-million loan on the properties at an unusually favorable rate for today’s lending environment, along with proceeds for future investments, thanks to a rare 27-month rate lock that was negotiated by Johnson Capital. Kevin Burkhalter, a senior vice president in Johnson Capital’s Los Angeles office who arranged the loan with a major insurance company, tells GlobeSt.com that the rate lock is one of the longest he knows of involving an insurance company lender. In addition, the negotiations to arrange the financing also established a set of conditions that provided an unusual degree of flexibility for the borrower in terms of identifying the properties to be financed.

“Most insurance companies don’t want to go more than 12 months forward on a rate lock,” Burkhalter says. Another unusual aspect of the financing, he points out, is that the loan security remained unidentified until August, when construction was nearing completion on the last of the three warehouse buildings selected for the loan.

The interest rate on the $54-million loan, which Burkhalter locked in October 2005, is 5.8%. Even with the additional costs associated with a forward rate lock, the interest rate came in at least a half a percentage point lower than it would have been if the borrower had waited until December 2007 to seek the financing, he notes.

When Johnson Capital rate-locked the deal in October 2005, Burkhalter points out, spreads over Treasuries were in the low 100s. But by the time the loan closed, spreads were well over 200. In addition to its favorable rate, the 10-year loan, which amortizes on a 25-year schedule, provides proceeds for the borrower to invest in future acquisitions and development.

When Johnson Capital set out to arrange the financing, Burkhalter explains, “We didn’t know exactly how many buildings would be involved, who the tenants would be, the lease terms, the rents or whether the properties would be older or newer buildings.” The challenge was to negotiate loan conditions that were defined enough that the lender felt comfortable rate-locking the funds but flexible enough that the borrower would feel comfortable about meeting the conditions.

The solution was a loan agreement that spelled out a list of conditions such as the target cities in which the properties could be located, their minimum clear heights, maximum ages, the amount of office build-out permitted and other requirements for the loan to close. The three buildings that were ultimately identified were built between 2005 and 2007.

When Johnson Capital sought the 27-month rate lock in October 2005, Burkhalter says, “We could only find one insurance company that would go that far forward.” Even today, he says, “I still don’t know of another insurance company that has gone that far forward with a rate lock.”