Dallas-based Trammell Crow is one of the largest multifamily developers in the country. Yet it is facing a major dilemma when it completes a project in this economy. Traditionally, in a more perfect world, it would sell the asset. Otherwise, it would go to Fannie Mae or Freddie Mac for long-term debt. But to get long-term financing with Fannie or Freddie, owners need to throw in more cash—something many of them don’t have right now.
So today, Trammell Crow is left with one option. “We have to work with our banks to extend our loans,” says Ron Terwilliger, chairman of the firm.
And so far, the banks have accommodated Trammell Crow—along with many other developers and owners. “I have not seen any evidence of banks yet who seem to want to take the property, unless the sponsor is screwed up and hand them the keys,” Terwilliger says.
In fact, all across the multifamily business, apartment owners are staring down the barrel of a loaded gun of maturities coming due on construction or rehab loans. In some cases, they’ve breached a covenant by blowing past their debt service coverage ratio (DSCR). Still, banks seem to be sticking by their borrowers, extending loans and hoping that troublesome signs will work themselves out.
“Most loans are being extended past original maturity by banks and life companies because most are good loans to faithful borrowers, and, if not, there is no practical alternative,” says Harry H. Cheatham, vice chairman for St. Louis-based Love Funding. “So, if a borrower has adequate collateral [even if diminished from before] and has paid as agreed, the loan is extended with perhaps some tweaking. Lenders do not want the loan to be 'past maturity' because most lenders are regulated, and a past maturity can get classified as a trouble loan, which would have capital reserve consequences.”
There’s also some benefit for the bank to choose this "extend and pretend" option as well. “If my choice is foreclosure or not, it’s probably easier to extend or modify the loan term and pretend nothing is wrong,” says John Bartling, managing partner at Dallas-based AllBridge Investments. “If you can extend it out and convince auditors and it’s not hard of a risk, you can get acting treatment, and you have better capital charges against it.”
Tim White, president of PNC ARCS in Pittsburgh, says borrowers won’t just get extensions. They have to give up something, and they have to start working well before, maybe as long as 18 months, before their maturities are due. “Borrowers will be expected to make meaningful contributions to any possible solution,” he says. “They will be expected to maintain quality of the property.”
But not every loan can be extended. “If you’re a bad borrower, or you’re not taking care of the asset, someone may not want to extend and pretend,” Bartling says.
Other times, the bank's balance sheet issues may be the hurdle to an extension. “Some loans are not candidates for renewal or extension because of lender or borrower problems,” Cheatham says. “If the lender has had capital deterioration and must shrink their assets to adjust to capital requirements, the lender may refuse to extend the loan and demand payoff. In that case, the lender may even offer a payoff at a discount—depending on the urgency.”
Eventually, though, some fear the flood of CMBS defaults will come due and make extensions nearly impossible. “More troubling will be the gazillion dollars of CMBS that comes due is leverage beyond current standards that simply cannot be refinanced or extended because there is no longer a source of funds,” Cheatham says. "This is truly a financial tsunami."
