WASHINGTON, DC—A chief question on many borrowers' minds these days is not what can or cannot get done right now. Rather, it is what will be able to get done in the next few years when the looming schedule of debt maturities comes due in 2016, 2017 and 2018.

This theme, explored in the April issue of Real Estate Forum, is surprisingly relevant to borrowers in the DC area-a group and a market that is more accustomed to being pursued by lenders than vice versa.

In general, the real estate industry has faced down this question before, notes John R. Mallin, a Hartford, CT-based commercial real estate partner at McCarter & English who represents developers on a variety of real estate finance issues. "We see this scenario on occasion, as earlier transactional and refinance activity, and the terms of the CMBS debt that drove it, create significant debt maturing around the same time," he says.

The simple fact is there's never an easy answer to this question of how borrower-friendly the refinance landscape will be in X number of years, he continues. "It's a number line—not an absolute—with some factors working in favor of borrowers and some against them. But the bottom line is that lenders have two choices: refinance or take back the collateral. Given the way the markets are working, there's no real appetite among lenders, and hasn't been for some time, to take back properties." It's a strong argument in favor of most borrowers being able to refinance their maturing CMBS debt.

But CMBS has its limitations especially in a market like DC where foreclosures and struggling properties are more the exception than the norm. When Harbor Group International acquired 450 H St. earlier this year, the company turned to the CMBS market for financing and secured a 10-year, interest-only loan.

The company was, of course, happy to have the option. After the housing crash, the conduit market retreated to lick its wounds for several frightening months.

However, HGI's thinking about CMBS and what it can and cannot do point to the limitations of this option, even though it's the backbone of commercial real estate finance. “We're not exclusively a CMBS borrower because it can be a fairly structured process,” says T. Richard Litton, Jr., president of HGI.

CMBS is not the ideal financing source if the borrower expects it will want to prepay a loan—that is, it doesn't work for buildings that will have a quick turnaround. “We use CMBS in situations where the holding period will match up closely to the term of the debt and where there can be an attractive cash flow at a fixed rate," Litton says.

Also, CMBS has become more conservative in its underwriting in this cycle. It is possible, even likely, that some properties may still not meet CMBS' criteria for a refinance even if they have gained in value.

"Underwriting standards in this cycle are stricter with more focus on the sponsor and more focus on actual in-place cash flow," Litton says. “There is no credit for pro forma rent increases, for example, although in some markets like New York City, lenders are giving credit for contractual in place lease bumps."

Still, Litton is of the mind that borrowers seeking refinance in 2015 onward will be able to squeak by. "A few years ago, we envisioned fire sales and distressed opportunities. But some sectors, especially apartments, have greatly improved."

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