Commercial Investment Real Estate Summer 2020 | Page 16

INVESTMENT ANALYSIS
By Gregory J. Porter
ADJUSTING
THE RULES OF
REFINANCING
The economic fallout of the COVID-19 pandemic will have
long-lasting effects on refinancing in commercial real estate.
While state and municipalities across the U.S.
begin to reopen after COVID-19 lockdowns,
commercial real estate owners with nearterm
loan maturities have no choice but to prepare
to refinance their loans. The possibility of a technical
default, exorbitant default fees, and the commencement
of foreclosure proceedings should never be taken
lightly. While some lenders may offer these borrowers
extensions, owners need to be 100 percent prepared to
refinance properties unless they have already received
a loan extension or a loan modification document.
The lending landscape has drastically changed
post-COVID-19. The good news is that loans collateralized
by multifamily properties and manufactured
home communities are currently available through
government-subsidized programs like Fannie Mae,
Freddie Mac, and FHA/HUD, which are similar to pre-
COVID-19 loans. Even though these loans remain the
best option for property owners, lenders will require
new forms of documentation and offer less leverage
than before the pandemic.
Owners should hire experienced mortgage professionals
(ideally those with post-COVID-19 loan closing
experience) to negotiate on their behalf as it relates to
newly created six- or 12-month debt service, real estate
tax and insurance reserves (regardless of property performance),
new cash-out limitations, interest-only period
reductions, and lower loan-to-value requirements.
Remember, loan terms are the single most effective way
Owners need to
be 100 percent
prepared to
refinance
properties
unless they
have already
received a
loan extension
or a loan
modification
document.
for a commercial real estate owner to maximize their
after-debt service cash flow and return on equity.
For non-residential commercial real estate properties,
the lending options are much more limited, and
the air has gotten extremely thin. As of early June, a
reputable commercial mortgage-backed securities
“money center bank” has re-emerged and is providing
much-needed liquidity in the marketplace, though the
CMBS market is not widely open for business.
Insurance companies, for the most part, have
retreated on their lending activity, except for the most
conservative loan terms. They are in a wait-and-see
approach, which is common during periods of economic
uncertainty. Some local and regional banks are
still open for business, but nearly all of them require
full or partial recourse, which does not work for certain
borrowers or institutional sponsors. Lastly, debt funds
and specialty finance companies have been the lenders
that have generally been the most negatively impacted
by COVID-19. The evaporation of CLO securitizations
— or collateralized debt obligations, which up until
COVID-19, provided many of these lenders with significant
liquidity — has crippled their ability to actively
lend. In addition, debt funds and specialty finance companies
have been hammered with heavy margin calls
by their line or repo lenders. Consequently, some debt
funds and specialty finance companies are currently
hoarding cash to ensure they can make future margin
calls and survive.
14
COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
SUMMER 2020