After securing debt on a property, many owners make their payments and don't think about the debt until the loan is near term. However, there could be creative options for owners—even if that means paying a defeasance. Gary Tenzer, co-founder and principal of George Smith Partners, has recently completed two creative financing packages on behalf of his client G.H. Palmer that helped save significant funds by lowering the interest rate significantly. Tenzer says that these loans are provide a good incentive for borrowers to pay more attention to their debt and work with their capital markets brokers to find opportunities.

“Unless an owner has a loan coming due, I don't think that owners are thinking about their debt,” Tenzer tells GlobeSt.com. “I think that it is something that we have to remind them to focus on. It is something that they put away in a file, and don't think about. They borrow money on a property and make their mortgage payments. For most people, this isn't something they think about until the loan is coming due.”

Tenzer said that the creative solutions are all about locking in a lower interest rates. When he can lock in a lower rate, it will offset the defeasance cost while providing a savings over the term of the loan. “Think about the math,” he says. “If you can get 1.25% savings on the interest rate each year, and it costs 2% for a defeasance. You would be at roughly a breakeven for the interest rate savings in the first two years. Now, you have locked in 4% for the next eight years.”

While this solution does incentivize owners to keep an eye on their debt and current interest rates to save money, it is also a good method of protection against rising interest rates, especially in today's market where interest rates are on their way up. “You are protecting yourself against increasing rates in the future,” says Tenzer. “If market rates are higher than the rate on the existing debt, it doesn't make sense at all.”

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Why Owners Should Pay More Attention to Their Debt

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