Who would have guessed that the beginning of 08 there would be so many issues with the capital markets and subsequently individual entrepreneur's options to refinance their commercial mortgages? Margins have nearly doubled in the last 6 months from 2% to as high as 4%, despite index's and the fed rate cuts. Inflation looms and many commercial real estate owners scrabble to get into long term fixed rate financing out of fear of what the market might look like in a year or two.
We hear borrowers that lived through the Jimmy Carter days talk about 20% plus rates and a strong desire to never live through that again. We've even seen borrowers voluntarily refinance out of their current loan into higher rate, yet longer fixed period loans.
What is still out there? What can a borrower expect if considering a commercial refinance?
Sincere General State of Confusion
In general there is a real confusion as to what the guidelines are and what they will be in the coming weeks. Many lenders have simply bowed out and are not quoting rates until the situation stabilizes. No one likes to tie up a loan, order third party reports, only to have the loan declined due to altered underwriting guidelines. Further, the general mentality if a deal is borderline, is a very quick "no" or to simply ignore the loan request.
It is frustrating to all involved - not just the borrower. Below is a look at a few specifics but the borrower should keep an open mind as these and other guidelines are changing - in both directions.
Recourse vs. Nonrecourse
Owner occupied non recourse is basically gone; exceptions on this would be for extremely liquid strong borrowers with loans above $2,000,000. Income producing properties can still qualify but criteria is tightening. Underwriting guidelines like town population have moved up to 50,000 - 100,000 minimum from a minium of 10,000 a few months ago. Debt coverage ratios need to be above 1.3 and minimum loan to value have tightened signifacantly. Essentially the deal needs to be perfect to qualify for nonrecourse.
Loan to Value
Loan to value requirements on refinances vary widely based on building types. For example, flagged hotel operators now are hard pressed to find lenders that will fund 60% on a cash out refinance. 6 months ago, 75% was difficult, but doable. For your standard office, retail, or industrial buildings, loan to value on cash out refi's have dropped to 65% across the board with a few lenders still going to 70%.
Rate and term refinance maximum have stay pretty stable, 75% is still available. However, lenders compensate by tweaking other less obvious requirements. For example, underwriting vacancy minimums have been increased to 5%-7%, from 3%-5%, management to 5- 7% from 3-5%. Essentially, by changing these smaller components the loan to value is indirectly reduced.
Term
Many borrowers confuse term with fixed period. The term can be more precisely related to when the loan balloons. So it's possible to have a 5 year fixed, 10 year term loan that is amortized over 25 years, for example. At this point, the term has not been too affected, though fixed periods have in general been reduced. It is still possible to find lenders that offer commercial 30 year and 25 year fixed programs, though rare.
Prepayment
Like the term, prepayment penalties have not been greatly affected by the current market. From typical banks, borrowers can still expect 5% -3% for 5 -3 years. National CMBS lenders still ask for stiffer prepays often at 10% for 5 years.
Third Party Reports
Title, appraisal, environmental fees have stayed virtually the same though the timing has shortened as the demand for these reports has softened. Borrowers can expected to pay $2,000 -$5,000 for an appraisal, $800-$4,000 for title and around $2,000 for a phase one.
The general feel and advice for borrowers is to take advantage of the current, still available, options and close their commercial refinances as soon as possible.
