If you need to refinance, you’ll be subject to a new appraisal and the accompanying risk of a lower value. A new appraisal will use a higher cap rate against income being pressured by a challenging economy. Couple this with the lower loan-to-value constraints being implemented by most lenders today, and there’s a strong possibility you’ll need to bring significant cash to the table at closing.
Regardless of whether you can negotiate an extension, if you believe there’s an equity gap, it would be prudent to set aside or reserve some of your current excess cash flow. By doing this, you essentially hyper-amortize your loan. If you’re forced to go to market and there’s an equity gap, you’ll have cash in reserve to help fill it.
Properties at Risk
If your property has adequate cash flow to service its debt and you’re faced with the possibility of a loan default and subsequent foreclosure, remember you’re not alone. This is important to a lender because it may demonstrate that current market conditions rather than the property owner are largely responsible for the loan’s nonperformance. It’s very expensive for a lender to foreclose on a property, so if the underlying weakness is due to market conditions, the lender may determine the most economical solution is to modify rather than foreclose.
Before contacting your lender, do your homework or get help from a mortgage professional to survey the financing market and identify potential alternatives to present to the lender. Once again, don’t hide, just seek solutions. This demonstrates a proactive approach and can prove a loan modification is the best scenario for everyone involved. Additionally, seek an investment-sales broker’s advice to help determine your property’s value and if selling it is a potential solution.
Loans originated by a portfolio lender (lenders who hold the loan on their balance sheet) are easier to negotiate than securitized loans, such as commercial mortgage-backed securities (CMBS), since you work directly with the entity holding the loan. A portfolio lender can make its own economic decisions and modify a loan at any time.
Conversely, CMBS or securitized loans administered by a third party, called the Master Servicer, cannot be modified until they are in technical default.
When a CMBS loan defaults, it’s transferred to another third party, the Special Servicer, who has the authority to modify the loan based on rules dictated by Real Estate Mortgage Investment Conduit tax laws and the “pooling and servicing” agreements governing CMBS loans. At the time of this writing, the U.S. Treasury was considering whether to issue guidance to make it easier to modify a CMBS loan.