Other News

  • September 6, 2019
  • Exploring the Inland Northwest’s CRE, Finance Markets
  • August 19, 2019
  • Newmark Realty Capital Expands Production and Servicing Team with the Addition of New York’s Rose Hill Group Producers and Staff
  • August 15, 2019
  • Newmark Realty Capital Celebrates Ten Years Of Dedicated Operations In Spokane
  • August 13, 2019
  • Loan Production Associate (Seattle)
  • June 3, 2019
  • CMBS Financing Still Has Big Benefits
  • May 29, 2019
  • Why CMBS Debt Has Fallen Dramatically in Recent Years
  • May 1, 2019
  • Underwriting Holds True Across Portfolios for Q2
  • April 19, 2019
  • Newmark Realty Capital Completes $316.5 Million of Commercial Mortgages During 1Q2019
  • March 28, 2019
  • Why You Need a Full Financial Workout Even During a Boom
  • March 22, 2019
  • Real Estate Loan Administrator – Phoenix
  • February 28, 2019
  • Newmark Realty Capital Celebrates Completion of Seattle’s Arrivé Tower
  • February 7, 2019
  • Diversity Will Benefit Your Bottom Line
  • February 6, 2019
  • Newmark Realty Capital Completes $2.47 Billion of Commercial Mortgages During 2018; Ends Year with 4Q2018 Production Totals of $669.1 Million across 73 Transactions
  • February 4, 2019
  • SB 826 Could Shake Up California’s Biggest CRE Firms
  • January 3, 2019
  • Newmark Realty Capital Expands Los Angeles Production Team; Names Paige Serden As Executive Vice President For Commercial Mortgage Production
  • December 7, 2018
  • Newmark’s George Mitsanas on What’s Driving Commercial Mortgage & Investment Finance
  • October 16, 2018
  • Newmark Completes $712.7 Million of Commercial Mortgages During 3Q2018
  • July 26, 2018
  • Newmark Completes $691 Million of Commercial Mortgages During 2Q2018
  • July 10, 2018
  • Stancorp’s Mark Fisher Shares Insight on CRE and the Value of MBA Engagement
  • June 5, 2018
  • Newmark Q&A: What’s Driving Southwest CRE Lending?
  • May 15, 2018
  • CREFC: California Legislation To Watch
  • May 7, 2018
  • Time for a Coordinated Bay Area Displacement Policy
  • May 3, 2018
  • Newmark Completes $409 Million of Commercial Mortgages During 1Q2018
  • March 26, 2018
  • City Welcomes Big Storage Center
  • March 6, 2018
  • Newmark Looks at Defining Trends in the Commercial Real Estate Market for 2018
  • February 9, 2018
  • Newmark Expands San Francisco Production Staff With Key New Hires; On-Boards Five Member Team Specializing In Commercial Mortgage Finance
  • January 25, 2018
  • Newmark Completes $2.5 Billion of Commercial Mortgages During 2017
  • November 27, 2017
  • Despite Forecast Increases, Rates At Historic Lows
  • November 8, 2017
  • Newmark® Completes $726MM In Commercial Mortgages During 3Q2017
  • October 24, 2017
  • Newmark’s Michael Heagerty Elected to MBA’s 2018 Board of Directors
  • October 11, 2017
  • Newmark Names Producers Andy Bratt And Demetri Koston as Partners With Largest Privately-Held Commercial Mortgage Bank in Western U.S.
  • September 13, 2017
  • Real Estate Loan Administrator – San Francisco, CA
  • August 7, 2017
  • Newmark Completes $731 Million in Commercial Mortgages During 2Q2017
  • June 29, 2017
  • Newmark Secures $151 Million of New Financing on Behalf of Presson Companies for 30 Property Arizona Industrial Portfolio
  • June 19, 2017
  • Newmark Secures $68M Financing for Silicon Valley Assets
  • June 5, 2017
  • Creating a Better Borrower Experience
  • April 12, 2017
  • Newmark Completes $517 Million in Commercial Mortgages During 1Q2017
  • April 4, 2017
  • Keeping Focus on Controlled Variables
  • March 7, 2017
  • Owners of Stabilized Properties Increasingly Turning to Floating-Rate Loans
  • February 27, 2017
  • CMBS Is A Vital Part Of The CRE Finance Environment
  • February 6, 2017
  • Multifamily Financing Tightened, But Not Stopped
  • February 1, 2017
  • JV Secures $325M in Financing to Revive Potala Tower Hotel, Apartment Project in Seattle
  • February 1, 2017
  • Real Estate Loan Production Associate (Los Angeles)
  • January 23, 2017
  • Newmark Completes More Than $2.4 Billion of Commercial Mortgages in 2016
  • January 19, 2017
  • Newmark Turns 10 in Seattle; $421MM Pacific Northwest Production in 2016
  • December 16, 2016
  • Newmark Turns 25, Reaches $30 Billion in Commercial Mortgages

Owners of Stabilized Properties Increasingly Turning to Floating-Rate Loans

March 7, 2017

Commercial Real Estate Direct Staff Report

Some property owners are increasingly turning to short-term loans against even stabilized properties, despite long-term interest rates remaining at near historic lows.

The odd trend is being driven by institutional investors in general, and investment funds with relatively short remaining lives, in particular. They might own a property that’s fully stabilized through a fund that may only have a couple of years of life left.

Instead of locking in a 10-year loan with a coupon of say 4.75 percent, they’re choosing a bridge loan that might have a higher coupon, but that includes prepayment flexibility. Property owners generally don’t want an asset encumbered with long-term debt when it comes time to sell in order to attract the largest number of possible buyers. Many REITs can borrow on an unsecured basis, so they might be turned off by a property that is leveraged with long-term mortgage debt.

“The rationale for stabilized property owners seeking short-term facilities seems to be driven by a desire for optionality,” explained Daniel Mee, executive director of Tremont Realty Capital, a Boston-area lender and mortgage bank. He said borrowers choosing a short-term loan “may want to consider a sale of the asset within the next 24 months and do not want to incur breakage fees on fixed-rate debt.”

Long-term holders of properties, however, are generally sticking with long-term loans.

The phenomenon might have a salutary impact on loan origination volumes in the coming years. Given that relatively few loans, from all lender types, were written in 2008 and 2009, the thinking has been that refinance activity in 2018 and 2019 would be minimal. The short-term loans that are being written today might be refinance opportunities in those years.

“There’s something going on in the psyche of borrowers that’s actually causing them to actually pay higher rates for shorter terms because they’re viewing the prepayment option as much more valuable,” noted Brian Harris, chief executive of Ladder Capital Corp., which funds both fixed- and floating-rate loans. “We’ve seen an unusual amount of loans with financing for two years instead of five or 10 years,” and their collateral properties are stabilized. “They’re occupied. They’re full,” he added. Harris was speaking on a conference call with analysts last week.

HFF, among the country’s most active mortgage intermediaries, is seeing much the same thing. While that typically would be an unusual phenomenon, given low current long-term rates, it’s not surprising.

“Because there’s a lot more institutional ownership of properties, there’s a lot more need for flexible debt,” explained Gerard Sansosti, executive managing director, who said 40 percent of the company’s 2016 loan volume was comprised of floatingrate financing. While that volume included construction loans and loans against transitional properties, a “significant” volume was written against stabilized properties, Sansosti said.

Long-term, fixed-rate loans generally include prepayment restrictions, so a borrower can’t simply pay off the loan before it’s due without facing a penalty. Most are structured with a yield-maintenance penalty, which would ensure that the lender generates the yield that was expected for the loan’s life. They also can be defeased, a complex and often costly process that involves replacing a loan’s collateral with government securities, ensuring that expected cash flows to the lender are uninterrupted.

But yield-maintenance penalties can be extremely costly, particularly if Treasury rates are low relative to a loan’s coupon. They typically are calculated as the difference between the loan coupon and prevailing Treasury rate for the remainder of a loan’s life, discounted to its net present value. Borrowers sometimes can negotiate fixed prepayment penalties, as opposed to yield maintenance, providing them more certainty. But lenders often will require a 10 to 20 basis-point increase in loan spread.

“A major concern for many borrowers now is the prepayment penalties,” concurred Robert Slatt, a principal with Newmark Realty Capital Inc., a San Francisco mortgage bank that specializes in the middle market.

He noted that a number of lenders – A10 Capital and LStar Capital to name two – have developed programs that provide greater prepayment flexibility. In addition, certain credit unions will offer flexible prepayment options, but they’ll usually limit their loans to $10 million or less. And some life insurance companies could be willing to structure certain prepayment flexibilities in their loans. They can, for instance, include a yield-maintenance penalty for the first few years of a loan, then fix that penalty as a percentage of the loan’s balance that would decline as the loan ages.

The expectation is that demand for loans with greater prepayment flexibility should remain healthy, as institutional investors and funds have accounted for just more than 25 percent of all property transactions over the past three years, according to Real Capital Analytics. In 2007, they accounted for 42 percent of that year’s $571.2 billion of transactions.

Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.

Share this Story

Wordpress Social Share Plugin powered by Ultimatelysocial