WASHINGTON, DC—A chief question on many borrowers' minds thesedays is not what can or cannot get done right now. Rather, it iswhat will be able to get done in the next few years when thelooming schedule of debt maturities comes due in 2016, 2017 and2018.

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This theme, explored in the Aprilissue of Real Estate Forum, is surprisinglyrelevant to borrowers in the DC area-a group and a market that ismore accustomed to being pursued by lenders than vice versa.

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

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The simple fact is there's never an easy answer to this questionof how borrower-friendly the refinance landscape will be in Xnumber of years, he continues. "It's a number line—not anabsolute—with some factors working in favor of borrowers and someagainst them. But the bottom line is that lenders have two choices:refinance or take back the collateral. Given the way the marketsare working, there's no real appetite among lenders, and hasn'tbeen for some time, to take back properties." It's a strongargument in favor of most borrowers being able to refinance theirmaturing CMBS debt.

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But CMBS has its limitations especially in a market like DCwhere foreclosures and struggling properties are more the exceptionthan the norm. When Harbor Group Internationalacquired 450 H St. earlier this year, the company turned to the CMBS market for financing and secured a10-year, interest-only loan.

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

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

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

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Also, CMBS has become more conservative in its underwriting inthis cycle. It is possible, even likely, that some properties maystill not meet CMBS' criteria for a refinance even if they havegained in value.

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

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Still, Litton is of the mind that borrowers seeking refinance in2015 onward will be able to squeak by. "A few years ago, weenvisioned fire sales and distressed opportunities. But somesectors, especially apartments, have greatly improved."

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For the complete version of the story, clickhere.

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