Interest rates may be creeping up, but there are still opportunities for borrowers to save. G.H. Palmer recently secured a $266.8 million loan to refinance existing debt on a four-property 1,359-unit multifamily portfolio. The borrower secured the loan nearly two years before its debt expired, and although the early payoff required a defeasance fee, the firm was able to secure a better interest rate and save money over the life of the loan.

“He was able to reduce his interest rate from what his existing rates were by 150 to 160 basis points. He was able to save a significant amount interest in the new loan, and that savings goes on for seven years,” Gary Tenzer, principal and co-founder at George Smith Partners, tells GlobeSt.com. Tenzer secured the funding on behalf of the borrower. The refinancing loan has a 7-year fixed-rate and is interest-only, non-recourse with a 3.54% rate and a 65% loan-to-value. Because the borrower agreed to make green improvements to the property, Tenzer was able to secure a reduced rate of about 18 basis points, to give a total reduction of 150 to 160 basis points off the existing rate.

Tenzer expects interest rates to rise next year, so there was good motivation for the borrower to refinance now. Tenzer was able to illustrate significant savings over the term of the loan, which made it an easy decision to pay the defeasance. “It is likely that rates will be higher next year than this year. So, interest rates are an issue. We had about two years to go before the loans were open to prepayment, so, he had to pay a defeasance on his existing loans,” says Tenzer. “So, the question is, what is the break even, or, in other words, how long does it take him to pay back the defeasance payment. The answer is 20 months. Twenty months from now, he'll be in the black.”

The lower interest rate wasn't the only benefit to the new loan package. G.H. Palmer was also able to lower the loan-to-value and pull equity out of the loan. “On top of that, he was able to pull a lot of equity out of the properties because we increased the leverage on the new loans,” Tenzer adds.

Not any borrower could achieve the same result. Tenzer says that the deal was somewhat of an anomaly, and Palmer, the owner of G.H. Palmer, understood the benefits of the deal. “He is a smart guy,” says Tenzer. “I brought this to him and he saw why it made sense.”

Other borrowers should act fast if they want to try to take advantage of lower interest rates. Tenzer says that they could rise in the near future. “I am surprised that they have stayed down this year, and I wouldn't be surprised if they went up 50 basis points in six months,” he explains. “This time next year, we could be up 75 basis points. Long-term rates don't follow directly, but there is some correlation. The yield curve moves in the same direction. I also expect treasuries to be higher.”

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Why Some Borrowers Are Opting to Refi Early

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