Commercial Magazine

The Refinancing Dilemma

Property owners with maturing loans need help to understand their options

By Ann Hambly

This has been a tough year for commercial property owners who are dealing with the prospect of having to refinance a loan. Lenders are not in the mood to negotiate and no one wants to make the first move.

“Since extending the current loan is likely the solution in so many situations, it is important that brokers understand how lenders and servicers are handling these cases.”

The current freeze in commercial mortgage activity has been ongoing for much of 2023 and sales transactions have dropped precipitously. According to a recent forecast from the Mortgage Bankers Association, commercial and multifamily mortgage lending is expected to fall to a total of $504 billion this year, down 38% from the total of $816 billion in 2022. In many cases, property owners who can afford to wait are choosing to do just that in hopes that interest rates will fall in the future.

Looming problem

A major problem may be looming in the future, however, as more than $1 trillion in commercial real estate loans will be maturing in the next few years. Mortgage brokers with clients who have maturing loans secured by office buildings or apartment complexes don’t have the luxury to sit and wait. Property owners are going to be forced to refinance at rates that are twice as high (or even higher) than their current loan, depending on the lender and the location.

Even the largest players are feeling the market effects. S&P Global Ratings announced this past October that it was putting Brookfield Property Partners on a negative watchlist, meaning that the Canadian real estate giant might be downgraded to junk status. Bisnow reported that the reason for the move is Brookfield’s large amount of maturing debt amid high interest rates and downward pressure on property values.

Brookfield isn’t alone. All borrowers are facing limited options. Refinancing is going to be difficult as lending for office buildings this year has slowed and nearly halted. And the sales options (assuming the value of an office property is more than the loan amount) are also limited as borrowers will be required to put a lot more cash into the deal. So, their only other option is to get the lender to extend the loan.

The property owners who have maturing loans secured by multifamily housing also don’t have the choice to sit and wait. Just like office owners, their options are limited. While there is an abundance of debt available in the multifamily sector, the interest rate on a new loan will, once again, be much higher than that of the current loan.

The loan-to-value (LTV) ratio will also be much lower for a new loan. Some lenders are now offering loans with maximum LTVs of 50%, which means that the borrower will likely need to use a significant amount of cash to pay off the existing loan. Luckily, there’s a durable market for multifamily transactions, so these properties can often be sold. The final option is to get the lender to extend the loan.

Extension issues

Since an extension is the likely solution in many situations, it’s important for commercial mortgage brokers to understand how lenders and servicers are handling these cases. First, brokers need to explain to borrowers that lenders have an advantage when they know that owners are desperate for an extension and have few other options. Lenders smell blood in the water. After all, what else is a borrower going to do but accept the term a lender is willing to give them?

Unfortunately, even when borrowers have good relationships with lenders, they’ll find this to be the case. Everyone working with commercial real estate is ultimately in the business of making money. When they see good opportunities to turn a profit, they go for it, so there is no faulting a lender or servicer for doing the same thing even when it may not feel fair to the borrower.

This appears to be what’s happening these days. It’s no secret that an owner’s options are limited, so they’ll usually have to accept the lender’s terms. Many borrowers wind up with two options: accept an expensive offer to extend or find a private lender, often known as a hard money lender, to refinance. In essence, the current lender is the lender of last resort.

Other borrowers, however, may qualify for other creative methods, such as a high-rate bridge loan, or they could sell the property. Although some of these options may be more expensive than the offer from their existing lender, they are still worth considering. The broker needs to emphasize to the client that the best thing they can do is keep all options open and approach the lender in plenty of time to pivot to the best solution.

● ● ●

The lucky owners in 2023 may be those who didn’t have their mortgage mature. The owners in trouble today — and for a few years to come — are those who will see their loans come due. Unlike COVID-19, there are no vaccines for maturing loans. The best advice that commercial mortgage brokers can offer clients who face loan maturity issues is to plan ahead.

Brokers need to advise clients on debt issues or work with them to find the right advisers at least six months prior to the loan maturity date. Borrowers need to figure out what their options are and how their lenders are handling extensions. This information will allow them to be prepared for the process they’re about to begin. ●


  • Ann Hambly

    Ann Hambly is the founder and CEO of 1st Service Solutions, a full-service CMBS advisory company with a singular focus on owners and borrowers. Founded in 2005, the company also is the first borrower-advocate company ranked by Morningstar Credit Ratings. Hambly has 30 years of experience heading up some of the largest servicing groups in the industry, including Prudential, GE Capital and Nomura, and has negotiated hundreds of pooling and servicing agreements for CMBS transactions.

You might also like...