You don’t have to look far in the commercial real estate press to find articles that highlight the record amount of debt that is maturing between now and 2028. Articles like this Wall Street Journal, The Bill is Coming Due, this Real Estate Crisis Looming on Banks or this 1.5 Trillion Wall of Debt is Looming–Bloomberg predict lots of pressure for borrowers who need to re-finance in the next few years.
Yes, the challenges are real for both banks and borrowers as loans mature, but there are some concrete strategies that borrowers can employ to get the best possible results as loans mature. We’ll explore those in these blog posts.
Step 1: Be proactive. Understand your maturity dates and seek out the prevailing terms in the marketplace. We would suggest that beginning this process a year (or more) in advance of your maturity would be prudent. Talk with your current lender and talk with others in the marketplace; understand what rates, terms and amortizations will look like for your property. We continue to see a wide range of terms being offered in the marketplace, so it is important to do your homework. Once you have a reasonable handle on rates and terms, re-underwrite your property to understand what your new debt service coverage and loan-to-value will look like. If they are strong enough for your lender to renew, great—you are in a position to try to negotiate the best terms possible. If not, dig into the numbers to understand what would need to change to get the appropriate DSCR or LTV in order to make the financing work
Step 2: Explore alternative financing strategies/sources. Look beyond traditional bank loans and explore alternative financing options such as private lenders, mortgage brokers, and mezzanine financing. These sources can sometimes offer more favorable terms or additional flexibility. Also consider exploring rate swaps, interest-only period
Step 3: Review your properties performance and determine if there are levers that you could pull to enhance your Net Operating Income (NOI). Does it make sense to offer a tenant a concession for an early renewal? Are there tenants below market rent who can be moved to the market in the foreseeable future? Are there expenses that can be trimmed in the short term to enhance NOI for refinance? Do a deep dive into your Income and Expense report to ensure you maximize your NOI.
Step 4: Consider a Sale or Strategic Partnership: If the first 3 steps don’t put you in a position to refinance with today’s terms, then it may be prudent to consider a sale of the property or consider exploring opportunities for partnerships. A qualified broker can give you a value opinion to tell you what today’s market would bring. Many market participants are interested in recapitalizing good deals that may simply need an equity infusion.
Expert Guidance: Navigating loan maturities in these uncertain times can be complex and having access to expert advice and guidance is crucial. Working with a knowledgeable commercial real estate broker or who understands the intricacies of the market can provide invaluable insights and help you navigate these challenges effectively.
By taking a proactive and strategic approach, you can mitigate the impact of higher interest rates on your commercial property debt and continue to achieve your investment goals.
Feel free to reach out if you have any questions or need further assistance.
