By David L. Church, CCIM, U.S. Realty Capital, LLC.
Rising interest rates and more conservative underwriting are beginning to have an impact on commercial real estate as five- and ten-year loans move toward maturity. The impact on multifamily projects is likely to be far less than the impact on commercial properties, particularly office buildings. While multifamily continues to maintain very high occupancy rates with significant annual increases in rental rates, office occupancies have dipped, are likely to continue to deteriorate, and rental rates will be flat at best for many properties in coming years.
The example above highlights the refinancing shortfall for a 60,000 s/f office property financed five years ago. Rent psf was $30.00. The loan of $11,838,000 was closed at 4.0% on a 30-year amortization schedule.
Five years later, the lender reviews the T-12 to underwrite the amount of a refinance. Both gross income and operating expenses increased at a rate of 2.5% per annum for four years. However, stabilized occupancy dropped from 95% to 88%. At the same time, mortgage rates increased to 6.75%, the cap rate increased by 100 bps, and the maximum loan to value provided by the lender fell to 65%.
The refinance with a potential new loan of $8,651,000 is constrained by loan to value. Since the outstanding principal balance on the original loan was $10,716,754 at refinance, the shortfall is $2,065,754. After factoring in transaction costs, the total shortfall is approximately $2,218,055, which is summarized to the below:
Having to produce significant new cash to refinance a building in today’s market is a hardship for most investors and developers. U.S. Realty Capital can assist borrowers in determining potential shortfalls on a conventional refinance and help structure creative solutions to minimize the actual cash outlay. Please reach out to us and let us know how we can help.
David L. Church, CCIM is managing director of U.S. Realty Capital, LLC.