One of the biggest challenges facing owners today is managing their loan maturities.
Since values have dropped as much as 40 percent in some markets, and refinancing capital may be difficult to find, owners are anxiously eyeing their schedule of maturing loans.
The good news is there are options for those who are current on their mortgage but fear they won’t be soon. Lenders don’t want to own apartments, especially in today’s market, and most of them are anxious to work with good owners stuck in bad submarkets. What's more, banks and CMBS servicers are increasingly offering extensions and amendments, kicking the can down the road with the hopes that fundamentals and the capital markets will recover a year or two from now.
So what can you do to position yourself for relief? Here is a seven-step strategy suggested by servicers, asset managers, and workout specialists.
Step 1: Know Your Options.
The first step is to search for replacement financing. Refinancing capital is available, most notably from Fannie Mae, Freddie Mac, and the Federal Housing Administration, but local banks and even life insurance companies may offer decently priced loans as well. Fannie Mae and Freddie Mac are offering rates in the mid to high-5 percent range, while the FHA’s Sec. 223(f) program was coming in about 20 basis points below that as of early November.
The FHA also offers longer amortizations and higher loan-to-value (LTV) ratios than the GSEs. This is especially true in pre-review markets, such as Florida, where the GSEs are much more selective. In hard-hit markets, refis from the GSEs could offer just 65 percent LTV, while the FHA will go up to 85 percent LTV as long as you’re not taking cash out (and up to 80 percent, if you are).
Step 2: Map It Out.
The next step is to get a handle on your loan maturity schedule. Start by mapping out all of the loans that will mature in the next two years, and do some underwriting exercises on what that loan would look like if you refinanced at today’s rates and terms. “If you have any maturities due within the next 24 months, I would be underwriting what my options are now,” says David Rifkind, principal and managing director of Los Angeles-based George Smith Partners.
Step 3: Keep Up the Upkeep.
Keep the property up. Lenders are much less likely to work with a borrower if their property has significant deferred maintenance. And lenders are taking a much closer look at the state of the property, and the owner’s role, then ever before. And lenders know that a property’s appearance could mirror the borrower’s financial health. “We’re going to look carefully at how the property has been run, what role the borrower played in that, and what they’ve done to help or hinder the current situation,” says Brian Hanson, managing director of Washington, D.C.-based special servicer CWCapital Asset Management.
Step 4: Start the Dialogue.
In the past, lenders wanted to have conversations six months before a loan would mature, but that timeline is now a full year out. “If you have maturing debt in 2010 and you have not had a conversation with your lender, you’ve made a mistake,” says David Cardwell, vice president of capital markets at the Washington D.C.-based National Multi Housing Council.
If you’re seeing fundamentals deteriorate and believe you may run into a payment default, communicate early and often with your lender or servicer. Lenders want to see that you’ve done everything you can to find a solution before contacting them with a request. But after you’ve done your due diligence, don’t waste any time before reaching out.
Step 5: Be Brutally Honest.
Sometimes, facing the hard realities confronting your properties is difficult. While hoping against hope can lift your spirits, it could also sink your prospects of getting an amendment or extension. “Be frank and honest with the lender about what’s going on with the property and what the expectations are going forward,” says T. Sean Lance, president of the Troubled Asset Optimization group of NAI Tampa Bay. “By sticking your head in the sand, you’re really delaying the inevitable and much less likely to get banks to work with you."
Lenders take a hard look at a borrower’s financial strength in determining the best candidates for relief, so you’re not doing yourself any favors by glossing over any negative aspects of your balance sheet. As in politics, the cover-up is often worse than the crime itself.
Step 6: Have a Plan.
Don’t look to the lender to tell you what to do. “It’s a disaster to go back to a special servicer and say, ‘What are my options?’” Rifkind says.
Borrowers looking for relief must come to the table with a well-conceived plan for the property and the way forward. This is true for both balance sheet and CMBS loans. For CMBS loans, this could be trickier since the REMIC guidelines and pooling and servicing agreements are complex. But owners who are able to speak the language of these documents, and to frame their request within those documents’ narrow confides, will do best.
“Make sure you map out a plan so that if it does get pushed to the special servicer, you can sit down and come up with a modification that is within their vernacular, within the guidelines of the REMIC and the pooling and servicing agreement,” Rifkind says.
Step 7: Renew Your Commitment.
Servicers and lenders are much more inclined to do a workout as long as the borrower is willing to step up with an equity infusion. “We’re pretty clear from the get-go that if we’re going to do a workout, we want there to be a renewed financial commitment,” Hanson says. That commitment can take many forms, from a simple pay down of the loan to requiring additional reserves.
The same holds true for agency loans. Freddie Mac, for instance, has been busy extending maturities, providing market refinancing terms, and even lowering the balance of existing loans in some cases this year to help keep defaults down. “They all require a recommitment to the property, where borrowers have to come up with some cash either for repairs and maintenance, or to pay down the balance of the mortgage,” says Daryl Hall, head of the multifamily asset management division of McLean, Va.-based Freddie Mac.