A commercial mortgage refinance can be quite challenging if you have not prepared. Borrowers that wait until the last minute often find themselves scrambling to find a solution, only to run out of time.
Below you’ll find what the pros do to prepare for refinancing so that they can create maximum leverage to negotiate the best deal, mitigate the chances of getting declined, and avoiding the pitfalls by being organized.
Balloon Payments 101
Most commercial mortgage have short terms, typically 5 – 10 years, with an amortization (i.e., a payment schedule) of 20 to 30 years.
For example, a 10-year term with a 25-year amortization means that your monthly loan payments will be based as if the loan was to be paid over a 25-year period, but after 10-years the loan matures and the entire debt then becomes due in a lump sum. This is called a “balloon” payment. Most borrowers simply don’t have the cash liquidity available to payoff the loan in full at maturity. Refinancing the loan is thus the only solution absent selling the asset.
Lenders structure commercial mortgages with these shorter terms for several reasons.
For one, shorter terms hedge against interest rate risk.
Also, it allows the lender to get a fresh look at the borrower’s full financial picture every few years, as well as re-appraise the property and adjust leverage or financial covenants accordingly.
Renewing with Your Current Lender
Assuming your lender is a bank, credit union, or private direct lender, then renewing the loan is a viable option.
If your lender wishes to keep your business, they probably already contacted you several months prior to maturity to explore renewal. Renewing with the current lender is typically the cheapest alternative from a fee and closing costs perspective, as you will avoid many of the closing cost associated with a new loan by doing a simple renewal.
However, it is not always so easy. In the years since you signed your mortgage, your bank may have altered its lending practices, credit standards, asset class preferences, or fallen under new leadership. These can all lead to a “no thank you” when you request a renewal.
Likewise, you may not want to do business with that lender any longer. Perhaps they were not professional or simply failed to live up to your expectations. Whatever the case, renewal may not be a viable option.
For non-bank lenders, such as CMBS loans and government agency loans (e.g., Freddie Mac and Fannie Mae), renewal is not an option at all. You must refinance these loans at maturity. There is abundance of this debt coming up for maturity in the next few years.
Between 2017 and 2018, $108 billion in CMBS loans will mature, with $87.1 billion maturing in 2016, $105.8 billion in 2017, and $12.8 billion in 2018. Many of those loans were made ten years earlier, in 2007 and 2008—at the peak of the market.
The Current Commercial Loan Landscape
Despite a generally stable market and a two-percent yearly growth of the U.S. economy, lasting doubts from the 2007 recession have caused some financial institutions to take a more cautious approach to lending.
Commercial mortgage lending has been steadily rising, but underwriting standards remain conservative.
Lenders’ preferences on asset classes have also shifted in recent years. Hospitality, industrial, office and even multifamily assets have mixed reviews depending on the lender.
Likewise, some lenders, including CMBS lenders, are shying away from shopping centers, fueled by a fear that classic brick-and-mortar shops are giving way to online retailers — aka the Amazon effect.
However, while traditional CMBS lenders and national banks may be backing away from shopping center investments, local and regional banks are stepping up to fill the gap. Many of them are now offering 7 and 10-year loans, with step-down prepayment penalties and even non-recourse.
Higher levels of competition between banks right now could mean a better environment for you to negotiate a deal.
Cash Out and Equity
Depending on when you purchased your property and for how much, you may have equity to work with.
Equity is obviously critical to your ability to get a renewal or refinance, and it is vital to be able to cash out. Lenders have generally favored leverage levels below 75% of value. If you have less than 25% equity, refinancing or renewal could be a challenge.
What You Need to Succeed With Your Commercial Mortgage Refinance
There are a couple crucial steps that you can do to secure a new commercial mortgage that fits your financial needs:
- Get your financials in order. You need at least 3 years of financial history and tax returns to qualify for most institutional lenders. Having these documents readily available early in discussions will allow lenders to understand income and stabilization.
- Get your leases in order. Lenders like to see stable, long-term leases. Now is the time to offer discounts to tenants to get them to renew early. Have copies scanned and ready to share with lenders. Your rent roll should be current and accurate. Detail oriented owners can demonstrate their professionalism without speaking a word. Other documents you should have readily available are asset statements, original corporate documents, and select personal financial records.
- Get management contracts in order. Now is the time to improve your offerings for tenants. Present discounts for long-term leases from renters, and provide incentives that will make them want to stay.
- Do your homework. Being prepared before you first meet with a lender will mitigate the risk of being declined. Perception is everything. When given a choice, and assuming all things being equal, lenders will much prefer to deal with an organized and prepared borrower versus the opposite. In turn, this creates leverage to negotiate a better deal. It also helps speed up the transaction, as you’ll save time having to search for information or documents.
Raisal is here to help you get refinancing you need, on your terms, and in an efficient, cost effective manner.
With a click of a button, our interactive, online platform instantly connects you to dozens of pre-qualified lenders that are algorithmically matched to fit your specific deal. Let them compete to win your business. Get your commercial mortgage refinanced today.
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