In this edition of Schelin Uldricks & Co’s Insights Series we explore the pending wall of commercial real estate loan maturities scheduled for 2024 and highlight one of our favorite capital sources that can provide a “one-stop” solution for many underwater borrowers out there. This topic came to mind after an interesting news article was delivered to our inboxes from The Real Deal. The article, titled “Distress looms as LA and OC see $21B in CMBS loans come due in 2024” was a stark reminder of a hot industry topic that has been buzzing for the past year. To sum it up all nice and tidy for you, dear reader:
- Interest rates were very cheap back in 2020 and 2021, which lead to a flurry of CRE loan originations
- Many loans were short term in nature, and made at floating interest rates so that borrowers could refinance or sell within a few short years after making property improvements
- Now these loans are coming due and property operations can’t support a cash neutral refinance because of one or multiple reasons such as….
- Interest rates are now significantly higher than they were back in 2020/2021
- Rents have flattened, and some have started to come down in many markets
- Operating expenses are up across all cost departments; taxes, insurance, payroll, utilities, R&M, and contract services have increased with the inflation we have seen coming out of the pandemic
- Demand is down; people aren’t going into the office with the work from home trend, retail has been on a downward trend for years, and several multifamily and hospitality markets have seen new unit deliveries that have brought down occupancy rates within the past 12 months
- Values are down and buyers are more discerning with ther acquisitions due to the same factors above
So what are borrowers going to do at loan maturity? With valuations down it doesn’t seem that appealing to sell. From the lack of sales velocity in the market over the past 12-18 months it’s been pretty obvious that most property owners are thinking the same thing and only motivated sellers are listing their properties.
The lesser of two evils is to refinance – extend your financing and hold until market conditions improve. However, as we noted above, these properties are not going to qualify for a cash-neutral refinance and will likely need some form of fresh capital above and beyond a new senior loan to be successfully refinanced.
With this in mind, we caught up with one of our favorite capital providers today to get a fresh look at their financing programs, and how they can offer solutions to many borrowers out there facing these exact problems. Here is a quick summary of what they offer:
- Fixed Rate Non Recourse Permanent Loans: loans as small as $5MM and as large as $200MM for stabilized properties with limited near term lease expirations. They will consider loans in all geographies, and all traditional property types (apartments, hotels, industrial, retail, office, etc.). Leverage maxes out at 65% right now but they can offer interest only up to 10 years or amortize their loans over a 30 year schedule. Interest rates vary depending on multiple factors, but hover around 6.75% right now for a 10 year loan. Their 5 year loan term option still prices higher in current inverted yield curve environment, with rates hovering in the 7.25% range. Additionally, they are offering an enhanced rate buydown feature of 25bps for a 1% fee. We typically see only 12.5bps for a 1% fee.
- Floating Rate Non Recourse Bridge Loans: this product is geared towards non-stabilized property – assets that need renovation, have an occupancy problem, or there is a pending material lease maturity. Our lender holds these loans on their balance sheet, so they prefer larger loans of $20MM+ and in primary of secondary markets. Leverage is situation dependent but can be up to 75%. These bridge loans have floating interest rates in the SOFR + 350 – 400 range (about 8.75% – 9.25% all-in right now) for most assets but charge a premium of 0.75% for hotels.
- Mezzanine Loans & Preferred Equity: a unique aspect of this capital provider is that they offer mezzanine loans and/or preferred equity as a complement to their senior loans, which can deliver all-in leverage of 85%. This last piece of capital ranges in price from 11% to 15%.
We think this program is going to be very attractive to many borrowers in 2024. Most traditional lenders only offer senior loans that top out around 65%. With depressed values and property cash flows, this is going to result in many situations where the borrower has to come up with fresh equity in order to effectuate a refinance, and many are finding it very difficult to raise this capital right now.
With this specialty lender, they can offer more leverage up to 85% which provides owners with a means to refinance and hold until market conditions improve – without having to come up with capital themselves.
About Schelin Uldricks & Co.
Schelin Uldricks & Co. is a firm offering investment banking services with a focus on providing capital solutions to real estate companies and other mid-sized businesses.
Headquartered in Huntington Beach, CA, Schelin Uldricks & Co. embodies a progressive entrepreneurial culture focused on integrity, transparency, execution, and ingenuity. The founding partners bring over 35 years of collective capital markets experience in investment banking, private equity, and real estate finance. The company offers a broad array of services, including debt and equity placement, M&A, GP advisory, divestitures, and financial restructuring.