NEW YORK CITY—While interest continues to grow in CMBS loans for retail assets, some have been predicting a reckoning of sorts as the calendar turns to 2016. It's confusing, to say the least. GlobeSt.com sat down with John Redfield, director at Faris Lee Investments, to get a clearer picture for ICSC New York National Deal Making 2015.

GlobeSt.com: What is the current state of mind in the CRE industry regarding the outstanding retail portion of CMBS loans coming due in 2016?

John Redfield: In 2015 retail had the highest defaulting rate of all asset classes, and in 2016 around $50 billion of retail CMBS debt is scheduled to mature. There has been tremendous speculation about the impact of this event for years. Understandably, now that the time has come, many people are wondering if we're about to enter a "perfect storm" in which a huge volume of high leverage retail CMBS loans are maturing. There is speculation as to whether the storm will occur, and what the severity will be.

GlobeSt.com: How will this affect the market and is this a dooms day scenario for owners with high leverage 2016 maturing CMBS debt?

Redfield: In my opinion this will not create a "fire sale" environment or dramatic shift in market value. That being said, it definitely still has the potential to impact the market for non-core product type that might face refinance issues due to high leverage. So it is critical for owners to proactively evaluate their options and select the best path to maximize their equity and minimize their risk.

GlobeSt.com: What are the options for owners with high leverage loans maturing in 2016 and 2017?

Redfield: The "standard procedure" for owners of exchanged high leverage loans has typically been to collect cash flow and "kick the can down the road" until getting foreclosed on or giving back the keys. But there are other options for owners in this situation, and it is important to evaluate all of them to make an educated decision. Some of the beneficial options an owner can leverage to preserve equity include the following:

Up-REIT. Depending on the owner profile and product type, one possible solution for a high leverage seller is an up-REIT structure. This structure is somewhat rare and must have a participating REIT, but it can be a great opportunity in the right situation. The owner can sell the property to the REIT in exchange for operating partnership (OP) units within that REIT. These shares usually have a minimum hold period, but can eventually be sold-off individually. This helps the seller remove the high leverage loan obligation and diversify into multiple properties all held within the REIT.
Zero Cash Flow Opportunity. A zero cash flow investment can be a great way for an owner to reduce high leverage risk and avoid tax consequences. Zero cash flow properties are set up with high leverage loans on strong credit tenants. They are usually fully amortizing loans (or close to it), which creates great long-term security and many have a "pay-down re-advance" feature, which in some cases allows the exchanger to pull out tax free equity after the exchange to place into a cash flowing investment.
Recapitalization. For owners that have properties they would like to hold on to and see long-term upside, a recapitalization through a joint venture structure can be a great opportunity for the owner to hold on to the property and cash flow while infusing new equity to refinance the loan and / or make necessary upgrades to the center to bring it back to maximum potential.
Discounted Pay-Off . Discounted pay-offs or reduced loan pay-offs (DPOs) to refinance do exist, but they are very difficult to execute and limit the seller's option once the process is started. Many owners are misled to think they can try a DPO and if it does not work, utilize one of the options that are listed above. In most cases, this must be a last resort option since the loan must be put in to special servicing to execute, which once done can create cash flow sweeps from the lender and be difficult to put back into master servicing if not resolved.

GlobeSt.com: What are you final words of advice on this issue?

Redfield: "Kicking the can down the road" to collect cash flow until a deed-in-lieu of foreclosure or actual foreclosure is done is not the only option in today's market. The existence of the above-referenced options will help to mitigate the detrimental effects of the swell of maturing loans to the overall market. However, to avoid a significant loss in cash or credit, minimize tax exposure and preserve equity, it is absolutely critical for an owner in this situation to reach out to professionals who understand these options. Each of them is uniquely complex, requiring significant investment expertise and in-depth financial skill. This is not for the faint of heart, but the right advisor can evaluate both the asset and the owner's forward-looking objectives to make sure money is not left on the table and the right path is selected to preserve equity, minimize risk and foster future growth.

Visit Faris Lee Investments at ICSC New York National Deal Making, booth #1215.

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