Borrowers should have these expectations as they walk onto the refinancing playing field:
- They will need to be more diligent in covering the market for a potential lender.
- Debt-service coverage will be higher, loan-to-values or costs will be lower, amortization periods could be lower and recourse will likely be expected.
- Property and sponsorship will be scrutinized much more intensely.
- Interest rates should be manageable, yet inflation is looming and rising rates could change field conditions soon.
Today’s refinancing playbook offers many game plans depending on the owner’s situation. Regardless of your field position, it’s a good call to maintain your existing banking relationships as the institutions currently holding the lending cards. Here’s a breakdown of various loan types, and suggested plays to ensure the best possible outcome.
If your construction loan matures in 2009, your request for permanent financing is easier to obtain if your property leased up as planned. Historic operating results will be your biggest obstacle in reaching a desired loan amount. While you may be stabilized today, or have reached lease-up in the past few months, it’s also possible that on a trailing 12-month basis your numbers are weaker because you were in lease-up phase. Expect lenders to look at your operating history beyond just the most recent months and underwrite conservatively. If you cannot make the case for a higher loan amount, ask the lender to build in a provision to increase the loan after you’ve achieved additional historic performance.
Further, although interest rates may be reasonable today, you should not lock into long-term deals with high prepayment penalties. The market will change and you likely will not want excess equity locked into your financing. Many construction loans are arranged as mini-perms and, in this market, the mini-perm option may be your best bet.
If your construction loan is coming due and your property is not stabilized, try to negotiate an extension with your existing lending institution. Even if it charges an extension fee or changes your interest rate, you will generally be better off than trying to find a new lender. If you do shop for a new loan on an unstabilized property, be prepared for scrutiny, highly conservative underwriting and additional equity investment. You’ll also have to justify when and why the project will lease up in the future. Your game plan will likely involve a take-out bridge lender willing to offer loans at 50 to 75 percent of original cost with varying degrees of financing fees and interest rates on a fully recourse basis.