While it seems that most people in the multifamily market have been giddy with excitement, Mike Kelly sees another side. The president and co-founder of Denver-based Caldera Asset Management says his phone has been ringing with calls from underwater owners looking to refinance. “With the 10-year [Treasury] jumping, our phones are starting to ring a lot because people are starting to realize that they can’t refinance their existing deals,” he says.

Kelly took some time to talk with Multifamily Executive senior editor Les Shaver about what he’s seeing.

MFE: Why did people wait to refinance?
KELLY: Most of them couldn’t refinance because they were blocked on yield maintenance. The debt rate was great for guys that could get rid of their yield maintenance and move on. If they could, they should have taken it and moved on. But most guys couldn’t do it.

MFE: Why are they dealing with yield maintenance now?
KELLY: The timing is better and the proceeds are better. The check is a little less than it was a year ago. The yield maintenance penalty is lower because of rate and time. They also see a better story going forward. There are not that many existing owners that can or will write a deleveraging check. The deals were bought five to seven years ago and didn’t turn out like they thought. Some guys are saying, "Give me time, and I’ll pay a little extension fee to live to fight another day." Other guys are trying to give the deals back with dignity so that it doesn’t impede them as much as it would if they became a pain to the lender. We’re having some success on deals that have a good future going forward by bringing in bridge equity to offset that difference between the new debt and the old debt. You put new debt on it, recapitalize the deal for another five to seven years, and move on.

MFE: What concerns you?
KELLY: The one thing that no one has been able to quantify is that if you look at the recent Trepp data, it’s the largest 60-days plus delinquency in multifamily on record. That’s partially a function of being in a new tax year. Guys who have been writing checks to stave off the deals have stopped writing checks. More importantly, amortization is kicking in on a lot of deals that were done in 2007 and 2008. These deals were limping over the past year when they were still in interest-only. Now amortization has kicked in, and the deals don’t support it.

MFE: How will improving interest rates affect these deals?
KELLY: Barring what’s happening in New York, Washington, D.C., and Boston, if interest rates continue to rise, you may have a scenario where people don’t sell because there’s not a lot of value above the existing debt. They’ll just stay on their hope certificate, ride it out to the maturity, and address it at that time.

MFE: Do you think cap rates are getting to low?
I don’t share those concerns in good markets because your REITs and your pension fund advisors have made their bed in those markets. Those guys are less debt-sensitive. I would be more concerned about Dallas, Houston, and Nashville—markets where even the nice quality stuff guys buy with financing. In those markets, cap rates have to come up. This time last year the play was, "I’m buying a low cap rate, but I’m getting great financing, and my investor is getting a great cash return." For the handful of guys who were very active last year, that was a great story. Now that story goes away when you’re at a 6 percent interest rate and you’re a 7 percent constant. It’s virtually impossible to grow your way out of that negative leverage.

MFE: When do you see the problem assets finally clearing?
You’ve got years there. The trailing 12 months loss severity was 46 percent with Trepp. There weren’t many maturities in 2009 and 2010. In the second half of 2011, you see it rise. In 2012, you have $40 billion of multifamily maturities that start hitting. The big number [for maturities] is in 2014 and 2015.