First off, know that you are not alone. According to the Mortgage Banking Association, an estimated $1.5 trillion in commercial real estate (CRE) loans will mature over the next three years. In the recent past, this wasn’t an issue worth discussing. Low interest rates coupled with high valuations and strong fundamentals led to nearly automatic refinancing opportunities or multiple-offer sales transactions. Owners were afforded several end-of-term alternatives, all positive for their bottom line. But for many property owners, this is now no longer the case.
Higher interest rates, market volatility, and tightened credit standards have left owners with fewer options to refinance or sell their assets as their existing loans come due. A disconnect in property valuations between sellers and buyers has halted the frenzied pace of acquisitions that occurred in 2021-2022. Some borrowers must now come out of pocket and put in additional equity to make refinance terms work. Additionally, commercial real estate owners are facing a much different landscape than just a few years ago.
We compiled the following best practice tips to help commercial real estate borrowers navigate how to prepare for a loan that is coming due.
CRE Loan Maturities Best Practice Tip #1: Prepare for Your Loan’s Maturity in Advance
First, start preparing early (and there is no such thing as too early). In the years leading up to your loan maturity, work to strengthen property fundamentals to best position your asset for a sale or refinance. Keep a pulse on your local real estate market, and use reporting tools to evaluate the best time to transact.
Asset management software, like Lobby CRE, can help you track property fundamentals and associated debt across your portfolio. Thirty Capital Financial’s Debt Optimization Model marries proforma assumptions, your current loan terms, and application of forward rate curve projections to stress interest rates, cap rates, and exit costs. The Debt Optimization Model can be used to determine when and if adjustments to your operations and debt strategy should be made. Finally, Lobby CRE provides benchmarking tools that can help ensure your property metrics are in-line with the market for your asset type and location.
CRE Loan Maturities Best Practice Tip #2: Get Organized
Second, get all of your ducks in a row. A good place to start is to double check that your financial reports, tax returns, bank statements, loan documents, and other financial property and entity records are complete and organized. EntityKeeper is a cloud-based entity management solution that helps businesses to stay organized and maintain corporate and loan records in a safe and secure location.
CRE Loan Maturities Best Practice Tip #3: Understand Your Call Protection
Third, understand your call protection. To do this, you must first determine whether your loan requires defeasance, yield maintenance, or something else. You should obtain yield maintenance or defeasance quotes to ballpark the costs involved. Defease With Ease (DWE), today Thirty Capital Financial, pioneered the defeasance consulting industry and remains the top choice for commercial real estate owners across the nation. The team provides free quotes for both defeasance and yield maintenance and will take the time to walk you through the complex process and calculations involved in these transactions.
CRE Loan Maturities Best Practice Tip #4: Create a Backup Plan
Next, have your originator or broker contacts on speed dial. It takes months to negotiate and close a refinance or sale, and market volatility only increases this timespan. Throughout 2023, lending standards have tightened. Originators are looking for just the right balance when underwriting loans, evaluating a multitude of factors like property type, asset class, location, sponsor creditworthiness, desired loan terms, property fundamentals, and economic conditions. In addition, the Federal Reserve’s rapid rate increases over the past year have translated to higher borrowing costs, financial covenant default concerns, and increased hedging expenses. Combine that with a cooling commercial real estate market as buyers become more discerning about where to invest their capital, and you are left with fewer options than just a year ago. Even if you have a loan commitment or buyer in place, it doesn’t hurt to have a backup plan.
CRE Loan Maturities Best Practice Tip #5: Communicate with Your Loan Servicer or Lender
Finally, in the months leading up to your loan’s maturity date, we recommend you reach out to your loan servicer or lender and create an open line of communication. You should make them aware of your exit plan, including providing the required notices for prepayment or defeasance transactions. If you are unsure how to proceed and require additional time, you may need to discuss a loan extension, modification, or other workout alternative.
As we enter Q4 2023, we expect market volatility to persist, fueled by geopolitical concerns, elevated inflation, domestic political turbulence, shifting workplace norms, and steady high interest rates. At Thirty Capital Financial, we are here to help CRE owners position themselves for the best possible outcome in any market environment.
You can also reach us at info@thirtycapitalfinancial.com for more information about our products and services offered through LobbyCRE and EntityKeeper.
