Volume III, Number I
Presented By Capital Markets Access Company & Swap Negotiators
CAPITAL MARKETS ACCESS COMPANY ▶ 399 Carolina Avenue, Suite 250, Winter Park, FL 32789 ▶ office 407.264.7251 ▶ fax 407.895.6001 ▶ CMACCAPITAL.COM
Are Your Retiring Partners Stealing Your Equity? They May Be If Your Swap Is Underwater By Shannon Stocker, M.D.
A North Georgia real estate LLC consisting of ten equal partners recently bought out three of the partners. Under the terms of the operating agreement, the property was appraised and the partners were paid their respective portions based on the equity available. The appraised value was $10,000,000 and the remaining debt was $7,000,000, leaving $3,000,000 of equity. Each partner received $300,000 (10% of the equity). Sounds fair, right? Far from it. In this case, the outgoing partners received twice the amount that they would have realized had the building been sold and the equity distributed. This occurred because the calculation of equity failed to consider the worth of the interest rate swap at the time of valuation. In this example, the
interest rate swap had a mark-to-market (MtM) value of negative $1,500,000. If the partners had sold the building for the appraised value of $10,000,000, they would have had to repay the remaining debt of $7,000,000 and the termination of the swap of $1,500,000. Each partner would receive $150,000 from the sale as their portion of the equity…not $300,000. Not only did they overpay the retiring partners a total of $450,000, but each remaining partner was left with only $85,714 in equity as opposed to $150,000. If the buyouts had been calculated with the all-in value considered, each remaining partner would have retained his true equity of $150,000. This pitfall can easily be avoided by obtaining an MtM value from a reputable third party such as Swap Negotiators. In this case, it’s a reversal of the old adage which should now read, “Let the sellers beware.”
Borrower Makes $26,255 in 3.4 Seconds A Great Lesson In Swap Market Movement Often times we are asked why, if there is an agreement on the spread, is it necessary to have a swap negotiator on the phone at the time of an interest rate swap trade. The answer is because the market never stops moving and, even if you have confirmed a rate going into a call, that rate can change dramatically by the time of execution. You need only consider this excerpt from the recording of a recent interest swap execution. The swap was for an amount of $10,250,000 and the dollar value of each basis point was $10,502. On the call was the bank’s swap desk, the borrower and Swap
Negotiators. ▶ We Pick Up The Call At 1:31:03… 1:31:03—Bank: My trader is seeing 181.5 basis points. 1:31:08—Swap Negotiators: We are seeing the same level. 1:31:11—Bank: Mr. Smith would you like to lock at 181.5? 1:31:14.4—Swap Negotiators (interrupting): Let’s let the trader refresh his screen, we’re seeing movement. 1:31:25—Bank: My trader is now seeing 179.0.
1:31:29—Swap Negotiators: We agree. 1:31:33—Bank Mr. Smith would you like to lock at 179? 1:31:36—Borrower: Chris? 1:31:41—Swap Negotiators: Looks good. 1:31:46—Borrower: Go ahead a lock at 179.0. ▶ This Is Not An Anomaly. Markets Never Stop Moving. Hedge With Your Eyes Wide Open!
Developer Leverages $1,300,000 Rate Savings Eleventh Hour Renegotiation Pays Big Dividends
All was set to go on a $16,000,000 MOB to house four ophthalmology specialty practices in Colorado Springs. Gallacher Development, headed by Kelly and Kevin Gallacher, had done a thorough job of negotiating the most favorable financing package possible among the banks in and
around the area. Then, just before signing the bank’s commitment letter, Gallacher learned of a similar deal that had closed in another area at even better terms. Gallacher confirmed that CMAC had closed several deals that were substantially more favorable than the market. In a
ON THE INSIDE ▶ Hidden Swap Charges Reach All-Time High
▶ Maximizing Your Appraised Value Advice From A Medical Building Appraiser
▶ Three Tips to Refinancing When Your Real Estate is Upside Down
Many Deals Being Done At 100%+ LTV
▶ Seven Quotes That Tell You All You Need to Know
About Interest Rate Swaps
▶ Perfect Payers Penalized as Banks Review Loan Portfolios
bold move, Gallacher recommended that the borrower hold off signing the commitment letter to allow CMAC an opportunity to negotiate with the chosen lender. CMAC found that the bank had provided a rate and terms that were as good as had been seen in the Colorado Springs market, but not as good as what CMAC had achieved with this same bank in recent deals in other states. Once CMAC brought this additional information to the local bank, that banker was able to replicate the non-regional terms. The savings in interest and fees? More than $1,300,000. “This is exactly why we chose this developer,” said Dr. Dean Carlson of Ophthalmology Associates. “They aren’t afraid to say that there might be someone out there with better tools. That’s what makes them exceptional developers.” Construction is due to be completed in February of 2013.
Borrowers Paying As Much As 5% Of Loan Amount In Added Fees
Beware The Technical Default
▶ Borrower Saves $75,000 in Hidden Swap Fees Last Minute Transparency Creates Reductions
▶ Bank Faces Allegations of Swap Overcharge
Swap Negotiator’s Audit Uncovers Discrepancy
▶ Catch Me If You Can
The Day Count Convention Maneuver
▶ Banks Holding Back Best Rates
3.95% Like Putting Lipstick On A Pig
▶ One Doctor’s Journey to Hell and Back ▶ Determined Ortho Executive Finds Lowest Rate
Third Time's A Charm
▶ AND MUCH MORE!