With LIBOR tied to more than $350 trillion of contracts globally and nearly $200 trillion of US dollar contracts, this is one of the biggest and most significant events in the history of financial markets. Use this eBook to help your firm adapt to the LIBOR to SOFR transition.
LIBOR is going away beginning June 30, 2023. The transition from LIBOR to SOFR requires commercial real estate (CRE) borrowers and lenders to understand their new replacement index and the potential effects the LIBOR cessation may have on their loans or interest rate hedges. To prepare for the transition, borrowers should take inventory of their commercial borrowings and determine which loans, if any, have LIBOR-based interest rates. Additionally, proactive borrowers will benefit from conversations with their lender(s) about alternative benchmarks, timelines, and the best path forward.
Preparing for the LIBOR to SOFR transition sounds overwhelming, right? That’s why our team of experts created the SOFR Hotline. Thirty Capital Financial can provide risk analysis, confirm fallback language and trigger events, confirm spread adjustments, and act as a resource for your organization during the transition to SOFR.
Here are some of the benefits you can expect when you speak with our team of SOFR experts:
The first step for a smooth LIBOR to SOFR transition is to understand LIBOR and SOFR and what the transition means for your firm and its loans and/or hedges. Without background knowledge, the conversations with your lenders may be more cumbersome.
When you contact our SOFR Hotline, you’ll learn about the LIBOR to SOFR transition. Plus, our team will answer important questions such as:
One of the most challenging aspects of the LIBOR cessation is how to move forward without defined fallback language in existing LIBOR-based contracts that will mature after the phase-out occurs. Once LIBOR is phased out, loans will be tied to a different index, causing a potential significant economic impact. The new index may not be defined in those legacy loans. In other words, legacy loans will likely be subject to new terms at the discretion of the lender and our team will help you review your terms and understand your options on loans at the transition date.
Amendments to hedged facilities may require special attention to the loans index matching the hedge index, the type of SOFR being used, and “trigger events” to the transition. An advisor, like Thirty Capital Financial, can provide you with tools and custom solutions for interest rate risk management by using strategies that consider your risk tolerance and the current market conditions. Whether it’s a lender requested amendment, applying spread adjustments, or extra fees being added, an experienced advisor can help you manage the interest rate risk associated with that debt, while minimizing costs, through consultations and strategic portfolio planning.
Thirty Capital Financial has helped clients navigate the LIBOR to SOFR transition throughout the past year. We can leverage our expertise to help you negotiate the best possible outcome for your organization. Thirty Capital Financial is familiar with current legislation, fallback options, alternative SOFR conventions, and spreads. Work with us to ensure your transition is accomplished in the most efficient and cost-effective manner.
Ready to get started? Contact our SOFR experts at sofr@thirtycaptialfinancial.com. Or, call us now at 1-877-297-9888.
The decision to defease a loan can depend on several factors, like near term maturity dates or volatile market interest rates.
Download this checklist to help you determine whether the right time to defease your loan is now.
We sent the Thirty Capital Financial team to Los Angeles to attend the 2022 GlobeSt. Multifamily Conference. There was no shortage of insights shared during both the educational sessions and in casual conversations amongst attendees.
Our team is always excited to meet industry peers, reconnect with clients face-to-face, and gain new industry knowledge. And at this year’s conference, we were able to do that and more.
We asked those who attended to share what they learned during the 2022 GlobeSt. Multifamily Conference and some of their favorite key takeaways. Read below!
Interest rates are on the rise, a trend that is anticipated to continue well into 2023. The Fed has now hiked rates at six straight meetings, which hasn’t been done since 2005. This month, the Federal Reserve raised interest rates by another 75 basis points, the fourth time this year. During the conference, panelists and attendees alike predicted that the Feds will increase rates by another 100 basis points over the course of its next two meetings.
Key takeaway: The commercial real estate (CRE) industry is bracing for what may happen in 2023 as a result of inflation and rising interest rates. CRE borrowers should have reserve resources in the event that rates continue to skyrocket.
Although a recession has not yet been declared, some national experts predict that a recession could happen sometime next year. At the GlobeSt. Conference, panelists and attendees alike agreed with this prediction, though weren’t necessarily excited about it. In some of the conversations we had at our booth, fellow attendees expressed fears about a potential recession. Some also had questions about how to protect their assets should the recession occur.
Key takeaway: Some CRE professionals are beginning to take a good look at their portfolios now to prepare for potential market shifts. Having a plan to protect your assets will be critical in 2023 – especially if an economic downturn occurs.
A recession has the potential to reduce demand across all commercial real estate asset classes. As costs and interest rates rise, some investors are limiting their real estate investments (or refraining from purchases altogether). Additionally, some larger commercial real estate firms are waiting until the market dips to deploy their capital.
Key takeaway: Commercial real estate industry leaders are preparing for tighter lending and higher interest rates, which could impact the volume of transactions.
In the midst of rapidly changing interest rates, Thirty Capital Financial can assist you with interest rate caps and swap terminations. Thirty Capital Financial helps borrowers purchase interest rate caps within an average of 3-5 business days. We help identify cap counterparties, generate cap term sheets, gather and submit KYC (know your customer) information, compile required Dodd-Frank representations, and get caps placed quickly. Additionally, we help borrowers set up automated alerts to eliminate surprises as they approach a springing interest rate cap.
Further, borrowers with legacy LIBOR loans should review their loan docs and consider transitioning to SOFR now (if the docs have fallback language). Thirty Capital Financial can assist you with the transition from LIBOR to SOFR.
Overall, the 2022 GlobeSt. Multifamily Conference was a success. Our team gained valuable information that we are still discussing with other commercial real estate professionals in our network. Have questions about our take-aways or want to connect on any of the topics? Please contact us!
The defeasance process is complex. There are numerous steps and multiple parties involved that must align for a successful closing. For borrower’s, it’s important to note that the defeasance process and timelines can differ depending on the third-party provider you select. As you prepare to defease your loan, you may wonder what Thirty Capital Financial’s process entails.
Defeasance consulting is a specialized service and relationship that lasts beyond the closing of the defeasance transaction. An experienced defeasance consultant who is also knowledgeable about portfolio structuring and pricing is important for a successful defeasance closing.
For over a decade, the Commercial Real Estate market benefited from an unprecedented cycle of historically low interest rates and a normal upward sloping treasury yield curve. This led to ultra-low financing rates but also expensive early exit defeasance scenarios. The interest rate landscape has shifted radically in recent months, making deal structuring and overall transaction economics much more difficult. One of the few silver linings from this market turmoil has been dramatic reductions in defeasance and prepayment costs. Some borrowers have realized a 125%+ reduction in costs, compared to estimates received in Q1. For context, defeasance economics and early loan exit costs are fundamentally driven by:
Interest rates in general have come up significantly since Q1 2022 due to an ongoing series of aggressive Fed interest rate hikes to combat inflation and address other geopolitical and macroeconomic concerns. Generally speaking, Fed meetings and rate decisions, which control the overnight Fed Funds Rate, are reactive steps to deal with current and backward-looking market factors. Short term treasury rates with maturities less than 3 years are more immediately impacted by Fed rate policy decisions. The longer end of the treasury yield curve is driven more by speculation and open-market consensus about future economic conditions. Yield movement on 10-year treasuries is generally separate from the shorter end of the curve, will experience less of a direct effect from Fed rate hikes, and may not move in lock-step with the federal funds rate.
10-year treasury rates have increased over 200bps since the start of the year. The volume and speed of those rate increases created an ‘inverted’ yield curve environment. This means that interest rates on the short end of the curve rose above the longer maturities.
In many instances, the short end of the curve has also risen above the interest rates of outstanding loans.
Loans that are currently being defeased or prepaid early are from loan vintages when borrowing costs were historically low. These low loan coupons are being defeased with treasuries that have yields similar to, or at times higher than, the loan interest rate. As rates on treasuries approach or surpass loan interest rates, more transactions are being defeased at par, or even at discounts to their remaining principal balance. Keep in mind, many yield maintenance prepayments carry minimum prepayment floors ranging from 1-3% of the loan balance, so they can’t realize the potential to exit at par or at a discount.
The fundamentals of a loan defeasance or yield maintenance prepayment point to the DCF model of discounting future loan payments, of principal and interest, to present value. At its core, sensitivity to rate movements is greatly dependent on the length of time remaining from the defeasance date to the final maturity date. The ‘dollar value’ of 1bps of rate movement (DV01) +/- will be much different for a loan maturing in 1 year versus another maturing in 5 years; with the 1y scenario being least and the 5yr being most sensitive.
Below is a high-level overview of AGCY (Freddie Mac) loans, maturing in the next 5 years, that can be potentially defeased at ‘par’ or ‘discount’ to outstanding principal. This proves to be one of the few bright spots for CRE investors when so many other market factors are negatively impacting transaction economics.
The right defeasance consultant is key in helping borrowers navigate the complex process of defeasing a commercial mortgage loan. An effective consultant can assist with navigating the financial and legal aspects of the transaction and act as a liaison between the borrower and its Servicer. But how do you ensure you choose the best provider?
Download this checklist to learn how to select the right defeasance consultant for your business.
Springing interest rate caps require commercial real estate (CRE) borrowers to purchase an interest rate cap once the floating-rate index on a loan reaches or exceeds a certain value. Typically, the loan documents will specify whether your loan is subject to a springing rate cap. If required, the springing rate cap must be purchased post-closing but only if the specified threshold is met.
Read ahead for 4 things CRE borrowers should know about springing interest rate caps.
Unlike traditional caps, springing caps occur well after closing (if they are triggered). Also, springing caps may not always be triggered as with traditional caps. And if the springing rate cap is not triggered, the borrower does not have to purchase the cap. Conversely, traditional caps are purchased upfront with a single payment at the closing of the loan.
In June and July 2022, the Feds increased interest rates by 75 basis. Last week, On September 21st, the Fed hiked interest rates by yet another 75 basis points, the biggest back-to-back increases since the early 1980s. As a result, caps are being triggered more often, thus causing an influx of springing caps.
Commercial real estate borrowers can benefit from springing interest rap caps in several ways:
In each of these scenarios, the borrower is protected from the rapidly increasing interest rates if and when their springing caps are sprung.
In the midst of rapidly changing interest rates, borrowers may find out that their caps have sprung at the last minute or even after the fact. In some cases, the borrower only has a couple of days to purchase an interest rate cap. Borrowers are likely to become frantic in this urgent situation.
Thirty Capital Financial helps borrowers purchase interest rate caps within an average of 3-5 business days. We help identify cap counterparties, generate cap term sheets, gather and submit KYC (know your customer) information, compile required Dodd-Frank representations and get caps placed quickly. Additionally, we help borrowers set up automated alerts to eliminate surprises as they approach a springing interest rate cap.
Need help getting started with your springing interest rate cap? Speak with one of our experts for a review of your loan portfolio today!
Rising interest rates are at the core of many commercial real estate (CRE) conversations today. As the Fed prepares to meet again this month, there is speculation that interest rates will rise another 75 basis points. Until the Fed discontinues its increase in the treasury, there will continue to be discussion around the ongoing impacts across the real estate market.
Thirty Capital Financial CEO, Kevin Swill, had the opportunity to lead a panel at last week’s IMN Mid-Market Multifamily Forum (West) conference. Their discussion was about The Refi Market in Commercial Real Estate. During the session, Kevin posed several thought-provoking questions about the current refi market, receiving overwhelmingly different responses from each co-panelist.
Read ahead for a recap of their insights and experiences shared during the session.
Today, the commercial real estate market is experiencing volatility due to rising inflation, widening cap rates, increasing supply chain shortages and pricing, and other factors. Aspects such as these have contributed to the market’s unpredictability and created additional risks for commercial real estate firms. The panelists’ responses regarding their future plans were unanimous: until the market cools, new asset acquisition is not in the cards.
Floating interest rate caps prices have skyrocketed due to the ongoing aggressive Fed rate hikes. The Fed increased interest rates by 75 basis points during their last two meetings. These increases have put a damper on floating-rate commercial real estate lending activity and placed increasing pressure on already-rising floating interest rates. As a result, some financing costs have become prohibitive.
One panelist shared that they historically used debt fund variable bridge loans for 3 and 4 year value-add holds. However, today they use fixed debt financing to protect themselves from the rising interest rates. Similarly, many borrowers are moving towards short-term fixed rate loans to minimize costs and avoid the need for interest rate caps.
The discussion then turned to springing interest rate caps, with mixed responses from the panelists. Some of the panelists still use floating rate loans and have no choice but to pay for interest rate caps. On the other hand, one panelist shared that they plan to purchase a 1-year cap. During the 1-year period, they are escrowing money to satisfy not having an interest rate cap for the last two years (or to cover additional unanticipated costs).
Note: Thirty Capital Financial has been busy with springing interest rate caps and 1- and 2-year caps as interest rate cap prices decrease. Schedule a meeting with one of our experts to review your loan portfolio.
Some loan documents may subject the borrower to prepayment penalties (i.e. a defeasance). Kevin asked the panelists how they determine whether it makes sense to sell or hold an asset. The panel was divided with some saying yes to a sell through assumption. Others have decided to pay the defeasance penalty and get out of the loan altogether due to market conditions.
Note: Since 2001, Thirty Capital Financial has helped clients Defease With Ease and can assist with Yield Maintenance Calculations as well. Schedule a consultation with a defeasance expert today.
One panelist researched the correlation between increases in the treasury rate and its historical impact on multifamily cap rates. The conclusion was that when bridge debt is due, the panelists will most likely opt for fixed rate loans on their refinancing.
Thirty Capital Financial can help you understand, analyze, and execute every part of your portfolio. Our experts can help you make informed decisions concerning what you can and should do to drive success in your real estate portfolio.
Contact our team of experts today for a consultation on refinancing.
Thirty Capital Financial, a division of Thirty Capital.
