Much of what is happening today was forecasted earlier in the year, but the problem is much worse than anyone expected. Businesses large and small are closing, causing vacancies in all commercial property types. People are losing their jobs or concerned about losing their jobs, spending only on necessary living expenses. This reduces store sales and causes slower tenant payments, broken leases and re-negotiation of rent.
The pressure is on the property owner to keep the cash flowing, and on the lender to keep the loan afloat. Mounting loan losses are restricting lenders’ ability to originate new loans, as capital must be retained to stay solvent. Rumor is the FDIC is planning to close more than 100 banks this year, but the number of banks on the watch list is much higher.
What You Should Do
Banks are still your best bet, but expect LTVs to max out around 60 percent to 65 percent and, on occasion, 70 percent. If you owe more than that, you may be required to pay the principal down, provide additional collateral or, if you’re lucky, have your existing lender refinance you at terms that hopefully make sense for both parties. Most banks are opting to keep fixed rates at three- to five-year terms or go with a straight adjustable rate. Amortizations range from 15 to 25 years or, sometimes, 30 years.
Rates in the mid to high 6 percent range should be expected at minimum and can exceed 7 percent with ease. Insurance companies and pension funds are also good funding sources, but they will cherry-pick the best properties with lower LTVs, good histories and strong locations. Expect 10-year fixed rates to be in the 7.25 percent to 7.5 percent range, and amortization to range from 20 to 25 years.
Start looking to refinance at least 6 to 12 months prior to maturity. Begin discussions with your current lender early to find out if it even will be able to entertain an extension. One of the biggest financing changes is the inability of mortgage brokers and bankers to fund loans nationwide, as many of those sources have either dried up or gone away, leaving a few national and regional banks and handful of insurance companies to provide the funds required.
Have your financial house in order and your property financials up-to-date for the best results in your financing search. Now more than ever, a mortgage professional may be the key to helping you obtain a loan—whether it’s the perfect one or not. These days, you may need to take what you can get.
David Smyle is the president of La Mesa, Calif.-based Benchmark Financial, a commercial mortgage banker providing financing options for self-storage and other commercial property types nationwide. For more information, call 877.862.7916; visit www.benchmarkfin.com.