Today, the commercial real estate (CRE) market is experiencing volatility due to rising inflation, widening cap rates, interest rate volatility and pricing, and other aspects. Factors such as these have contributed to the market’s unpredictability and created risks for commercial real estate firms that may be considering refinancing any of their assets.
Read ahead to learn about what’s happening in the current refi market and how this can impact your loans.
What’s Happening in the Refi Market?
Over the next two years, the CRE market is anticipated to experience over $1 trillion in loans coming due. A significant number of these loans were secured in the past five years when interest rates were lower, and a majority of these loans are held by banks. As a result, owners now face the challenge of refinancing or extending property-level loans for investments with a decreased net asset value (NAV) in a higher interest rate market. Refinancing today will often require additional capital, making it more costly than borrowers originally projected due to the combination of higher interest rates and lower valuations.
What Should CRE Borrowers Know About Refinancing Today?
The CRE market is constantly evolving, especially in a volatile interest rate environment, and staying informed about the current refinance market is crucial for CRE borrowers.
#1 Lending Standards Have Tightened
Lending standards have become more stringent in the current refi market. Lenders are exercising caution and carefully evaluating borrowers’ financial profiles. To qualify for optimal refinancing terms, a property should have stabilized property performance, high occupancy, and high quality tenants with solid management in place. Additionally, lenders will require borrowers to provide detailed documentation, such as detailed financial statements, third party property appraisals, and tenant rent rolls and lease agreements. Being prepared and having a well-prepared loan application is key to navigating the current refi market quickly.
#2 Loan-to-Value Ratio and Debt Service Coverage Ratio Need to be Considered
Loan-to-value (LTV) ratio and debt service coverage ratio (DSCR) are vital metrics that lenders consider when evaluating refinance applications. The LTV ratio measures the loan amount relative to the property value, while DSCR assesses the property’s ability to generate sufficient cash flow to cover debt obligations. In the current refi market, lenders have specific targeted requirements for these ratios and borrowers should familiarize themselves with the acceptable LTV and DSCR limits set by lenders to ensure they meet the criteria for refinancing.
#3 Prepayment Penalties or Defeasance Costs Requirements Count
CRE borrowers need to be aware of prepayment penalties and/or defeasance costs associated with their existing debt while considering refinancing options. Prepayment penalties are fees imposed by lenders if borrowers pay off their existing loans before their maturity date. Defeasance, on the other hand, is a method of compensating lenders for the loss of interest income when borrowers exit their loan prior to maturity. Both options add additional costs to the exit of the existing loan. Understanding the requirements and potential costs associated with these prepayment options are important in structuring the economics and timing of a refinance.
#4 Market Conditions and Property Values Should Inform Your Refi Decisions
Before refinancing a commercial property, borrowers should assess both current market conditions and property value. The performance of the local CRE market, rental rates, occupancy rates, and property demand can impact the feasibility and terms of refinancing. Conducting a thorough analysis and obtaining a professional property appraisal can provide valuable insights into the property’s value and market potential. By understanding market dynamics, borrowers can make informed decisions and negotiate favorable refinancing terms.
How Thirty Capital Financial Can Help You Navigate Today’s Refi Market
Thirty Capital Financial can help you assess and manage your capital obligations when it’s time to sell or refinance. Our experts use model scenarios based on market projections to help you make educated, timely decisions about your loans. Contact us today for a consultation!