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ARE THIS YEAR’S MATURING LOANS MANAGEABLE?

Last week’s GlobeSt.com Quick Poll asked readers if this year’s maturing commercial real estate loans are manageable. A total of 84% of voters responded that they are not, and indicated that the industry will suffer as a result. Howard Taft, managing director for the Miami office of Cohen Financial, says he is seeing first hand the challenges the industry is already facing.

“I firmly believe maturing loans will definitely make the industry suffer. We are seeing class A properties with good NOIs that are trying to refinance existing debt originated seven to 10 years ago that is now maturing and owners are not able to refinance. The original loans were closed for approximately 75% to 80% of value of the property at the time. Today’s stringent underwriting criteria, together with lower loan to value requirements and fewer lenders in the market, are contributable factors for the reduced loan amounts for the same properties–in some cases, 20% to 30% below the current debt.

“Another aspect affecting debt is that banks and life insurance companies are reducing the amounts they are lending by instituting artificial cap rate floors for the major asset classes. Banks also have higher debt service coverages and are giving no credit for increased rent greater than what was paid on the most current renewal. Those circumstances have also caused value-add deals to virtually disappear. In addition, expenses and cap rates have increased, while loan to value ratios have gone down to 65% to 70%.

The positive side is that there are several new companies that have entered the market and are providing financing for the gap. They’re lending up to 75% to 80% and securing a mezzanine position behind the new senior debt. Their pricing is approximately 15%, plus or minus, with some fees. If you blend the senior debt, with an interest rate of 7.5% to 8%, with the new 15% mezz loan, that would equate to an all-in rate of around 9%. At that point, owners should be happy that they were able to refinance their existent debt without giving up ownership.

“In reference to your inquiry of why some people are indicating that maturing loans are manageable: they probably have solid properties that most likely were financed by life insurance companies, with original leverage of 70% to 75% loan to value. Many people were conservative at the get-go. They weren’t the guys getting 85% loans, pushing rents, vacancies, etc. The new mantra through 2010 and beyond is to put more equity into deals.”

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