Cohen Financial, a national real estate finance company, announced that the firm has secured $152 million in debt refinancing for 42 free standing Walgreen's properties located in major metropolitain areas across the country. To mitigate interest rate volatility through the due diligence period, Cohen Financial provided the borrower an interest rate lock agreement for the $152 million debt refinancing with a corresponding yield maintenance hedge rate lock agreement on the $130 million existing loan balance.
The Walgreen's portfolio of 42 properties consists of a total of 621,473 square feet. Terms of the loan include an 80 percent loan-to-value (LTV) on a non-recourse, 10-year interest only loan. The lender is a correspondent of Cohen Financial. The borrower, Cornerstone Leased Drug Stores, LLC, is an affiliate of Park Ridge, IL based Newcastle Properties, LLC. Joel Simmons, a Partner in Cohen Financial's Skokie, Illinois office, originated and structured the transaction along with Steve Kundert, a Vice President also in the Skokie office.
Upon executing both interest rate locks, the borrower effectively secured a lower interest rate and new loan amount while locking in the treasury rate used to calculate the yield maintenance on the existing $130 million loan. This loan had been established as a fixed rate mortgage at an above market interest rate and currently had 21 years remaining. Eliminating the rate exposure on the old loan allowed Cohen Financial to complete the new loan surveys, consultant and title reports, as well as documentation within the 45-60 day due diligence period.
"Prepaying an old loan and refinancing at a significantly lower rate is not a novelty except for the fact that without simultaneously locking the treasury rate on both the yield maintenance and new rate, it wouldn't have worked," said Simmons. "After debt service payments on the old loan, there was literally no cash flow available to our client. With current treasuries trading at about five percent a new loan could be created that would both create cash flow where it didn't previously exist and fund enough income to cover the projected yield maintenance costs on the old loan. Even better, the after tax pay back period for the yield maintenance on the existing loan was less than three years."
"The loan closed 60 days after the interest rate locks were executed," added Simmons. "During that time treasury rates had fallen almost 30 basis points. The increased yield maintenance costs associated with this rate slide would have eroded the whole purpose of the refinance. However, when the locks were unwound the day prior to closing, the borrower was able to secure a $3.2 million profit on the hedge, covering most of the increased penalty."
Cohen Financial is a national real estate finance company offering debt and equity placement, investment brokerage, loan servicing and financial advisory services. The company is recognized as one of the nation's largest originators of commercial real estate financing, with over $5.1 billion in total transactions in 2005 and over $5.2 billion in loan servicing. The company has also provided financial advisory services on more than $1 billion of assets. Cohen Financial serves clients throughout the U.S. through its offices in 10 major markets.
