The countdown to the cessation of LIBOR is closer than ever with the June 30, 2023 deadline rapidly approaching. As the LIBOR to SOFR transition deadline approaches, it’s important for commercial real estate (CRE) borrowers to prepare for the upcoming changes. 

The LIBOR (London Interbank Offered Rate) has been a widely-used benchmark for setting interest rates on loans, including commercial real estate loans. However, it’s being phased out and replaced by SOFR (Secured Overnight Financing Rate) due to concerns over manipulation and lack of liquidity. 

Read ahead for five tips on how commercial real estate borrowers can prepare for the LIBOR to SOFR transition in the final months.

 

1.) Understand the Basics of LIBOR and SOFR

The first step is to understand what the transition entails. LIBOR has long been used as the primary benchmark for short-term interest rates, but its methodology has more recently come under scrutiny. SOFR is a new benchmark that is based on actual transactions in the overnight lending market. SOFR is expected to be more reliable and accurate than LIBOR, but it will require some adjustments to the way interest rates are calculated. Understanding the basics of the transition will help you prepare for any changes that may affect your loan.

 

2.) Check Your Loan Documents

It’s important to review your loan documents to see if they reference LIBOR. If they do, you will need to make sure that they are updated to reflect the transition to SOFR. This may involve renegotiating the terms of your loan with your lender, so it’s important to be proactive and start the process early.

 

3.) Understand the Impacts on Your Commercial Real Estate Loan(s)

The transition from LIBOR to SOFR is likely to have an impact on your commercial real estate loan, especially if it is a variable-rate loan. Your interest rate may change as a result of the transition, so it’s important to understand the potential impacts on your payments. You may want to consider talking to your lender to see if there are options for locking in your interest rate to avoid any potential fluctuations.

 

4.) Stay Informed on the LIBOR to SOFR Transition

The transition to SOFR is a complex process that continues to evolve. It’s important to stay informed about any updates or changes that may affect your loan. You can stay informed by subscribing to industry publications, attending industry events, or speaking with your lender.

 

5.) Consider Working with a Service Provider

If you’re unsure about how the transition to SOFR will impact your loan, consider working with a servnice provider, like Thirty Capital Financial, that specializes in commercial real estate lending. They can help you navigate the transition and ensure that your loan documents are updated to reflect the new benchmark.

 

How Thirty Capital Financial Can Help

The transition from LIBOR to SOFR requires commercial real estate borrowers and lenders to have a thorough understanding of the new index and the potential effects the LIBOR discontinuation may have on their loans or interest rate swaps. 

To prepare, borrowers should take inventory of their commercial borrowings and determine which loans, if any, have LIBOR-based interest rates. Also, you should begin having conversations with your lender(s) about alternative benchmarks, timelines, and the best path forward. 

For additional preparation, you can engage with a debt management services provider, like Thirty Capital Financial, to help you gauge how the transition to SOFR will impact your legacy and future loans and then create and implement a plan to ease the transition. 

 

Download the checklist, Transitioning from LIBOR to SOFR for Commercial Real Estate, for a step-by-step guide to successfully navigate the transition from LIBOR to SOFR.

The commercial real estate (CRE) market is constantly evolving. Today’s market shifts are impacting every facet of commercial real estate, including debt management, which historically has not been a focus area for many firms. But as interest rates rise and leverage decreases, it’s important to be able to understand, manage, and optimize your debt.  

Financial modeling is one method that can be used to help you manage your debt and successfully navigate the changes in today’s CRE market.

 

What Is Financial Modeling in Commercial Real Estate?

In commercial real estate, financial modeling is the act of making financial projections based off of current assumptions as they relate to a commercial real estate valuation and investment analysis. In real estate financial modeling (REFM), you analyze a property from the perspective of an Equity Investor (owner) or Debt Investor (lender) in the property and determine whether or not the Equity or Debt Investor should invest, based on the risks and potential returns.

How is the Commercial Real Estate Market Shifting?

Several factors have contributed to the changes in today’s commercial real estate market. These factors include increasing interest rates, rising cap rates, and rising cost of labor and goods. As a result of these changes, it is now more expensive to acquire or refinance new assets. Additionally, lower asset values and increasing operating expenses have taken effect.

These market changes are impacting projected returns for both the sponsors and the investors. As you navigate the changing CRE landscape, it’s important to consider how your portfolio and debt may be impacted.

How Financial Modeling Can Be Used to Optimize Debt

Forecasting debt is not always easy. If you have a fixed rate loan, it’s important to understand your loan documents to comprehend your pre-payment rights and penalties. With financial modeling, you can review and consolidate your financials to better understand your portfolio and optimize your debt management.

There are many types of financial models with a wide range of uses. The output of a financial model is used for decision-making and performing financial analysis, whether inside or outside of the company. Financial modeling can be used to make decisions about:

• Raising capital (debt and/or equity)
• Making acquisitions (businesses and/or assets)
• Growing the business organically (e.g., opening new stores, entering new markets, etc.)
• Selling or divesting assets and business units
• Budgeting and forecasting (planning for the years ahead)
• Capital allocation (priority of which projects to invest in)
• Valuing a business
• Financial statement analysis/ratio analysis
• Management accounting 

About Thirty Capital Financial:

Thirty Capital Financial is a leading service provider to the commercial real estate industry. Our team of advisors have spent decades providing solutions for defeasance, interest rate hedging, and debt management. With our personalized approach, we provide you with the tools, solutions, and strategies to confidently manage debt while supporting the growth of your company

Contact us today to speak with an expert!

We sent the Thirty Capital Financial team to Miami to attend the 2nd Annual IMN Middle-Market Multifamily Forum Florida. During the conference, Thirty Capital Financial CEO, Kevin Swill, spoke as a panelist for the session: Key Rules of Thumb to Underwrite When Developing a Proforma in Today’s Market. 

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 Kevin to share his key takeaways from the panel. Read below!

 

The Commercial Real Estate Slowdown

Today, the commercial real estate market is in the middle of a slowdown. This commercial real estate slowdown has created a snowball of effects causing decreased transaction volume, volatile interest rates, and reduced cash flow. Essentially, these effects signal the need to truly understand your operational processes. Understanding your operations can help you determine where you can cut or increase expenses to optimize cash flow.

Understanding Your CRE Operations

Over the past three years, expenses have outgrown revenue. In today’s inflationary environment, it isn’t safe to assume that you’ll realize a constant percentage of year-over-year expense growth. As expenses continue to outpace revenue, effective operations and expense management is critical. 

To navigate today’s inflationary environment and maximize operation’s management, you can:

• Consider your asset’s geographic region
• Examine your assets and their expenses
• Review each line item
• Identify where cost adjustments can be made
• Determine expense growth

With these steps, you can better understand your operations and expenses to make more informed decisions about your portfolio and opportunities to drive cash flow.

Optimizing Your Debt and Equity 

As the slowdown continues to impact key areas of commercial real estate, some firms may seek new methods to optimize their expenses. During the panel, debt and equity optimization were discussed.

In order to optimize your debt, you need the best possible net operating income (NOI). Refinancing a CRE loan is a common method used to maximize multifamily cash flow. However, with continually rising interest rates, refinancing your loan may not be the best option. An alternative to refinancing could be opting for a second mortgage to optimize your debt and increase equity. The equity gained from the second mortgage can be used to renovate outdated units and in turn attract new tenants and fill vacancies. Whatever route you choose, having a debt and equity optimization plan is critical.

Driving CRE Cash Flow

In commercial real estate, cashflow is critical to meeting and exceeding financial obligations, expectations, and growth projections across the firm. Essentially, cash flow dictates your property’s overall performance. Positive cashflow creates opportunities to grow the portfolio and can produce faster returns to the sponsor and investor(s). On the other hand, negative cashflow can drain your resources and impact portfolio growth.

As we look ahead over the next three years, we anticipate a reset of the market – where commercial real estate will return to a market-based interest rate and pricing environment for assets. So, it’s important now to monitor your operations, maximize expenses, and seek guidance on whether it’s time to refinance, sell, or hold your assets.

About Thirty Capital Financial:

Thirty Capital Financial is a leading service provider to the commercial real estate industry. Our team of advisors have spent decades providing solutions for defeasance, interest rate hedging, and debt management. With our personalized approach, we provide you with the tools, solutions, and strategies to confidently manage debt while supporting the growth of your company.

 

Contact us today to speak with an expert!

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:

 

SOFR Hotline Benefit #1: Learn about the LIBOR to SOFR transition.

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:

1. Why was SOFR selected as an alternative rate?
2. Where are we in the transition?
3. What “trigger event” will transition my loan?
4. How will the LIBOR cessation impact your current and future commercial real estate economics?

 

SOFR Hotline Benefit #2: Review Your Fallback Language (if any) to Understand What Will Happen On The Transition Date.

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.

 

 

SOFR Hotline Benefit #3: Modify or Establish New Hedges to Conform to the SOFR.

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.

 

Why Partner With Thirty Capital Financial?

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.