8 Essential Steps for Maturing Loan Borrowers
If you own commercial real estate with a maturing loan in the next couple of years, you’re not alone. The industry is calling it the “wall of maturities.” According to the Mortgage Bankers Association, a combined total of $523 billion in debt from CMBS, agency lenders (Fannie Mae, Freddie Mac, FHA and Ginnie Mae), Life Insurance Companies and Credit Companies will be maturing by 2018. These are the steps you should take now.
• First, read your note; know the specifics of your maturing loan:
o The actual maturity date
o The prepay premium period end date
o The type of prepayment premium (Step Down, Yield Maintenance, Defeasance)
o The default rate
• Begin planning your refinance or exit strategy. Under the best of circumstances a commercial real estate loan can take 45 to 60 days to process and close. Complicated transactions or poorly documented loan submissions can easily take twice as long to close. Underestimating the time it will take to close a new loan may be costly. The lender may impose the default rate (which may be 4% or 5% higher than your current note rate) on loans that have passed their maturity date.
• Evaluate the potential benefits of an early payoff, even if there is a prepayment penalty. Current interest rates are likely to be lower than your existing rate. Some types of prepayment penalty may be classified as prepaid interest and may be tax deductible (consult your tax advisor). The combination of a reduction in debt service and the tax deductible expenses may outweigh the cost of your prepayment premium.
• Assemble your property operating information; prepare annual income and expense statements covering three full years plus the year-to-date, as well as a current rent roll.
• Update your personal financial statement. The sponsor’s net worth and liquidity are among the first thing a prospective lender will want to evaluate.
• Engage your mortgage advisor to “Size” your deal and assess the strengths and weaknesses of your loan request.
• Be aware, upcoming changes in lender risk retention rules could temporarily slow or disrupt commercial real estate lending activities.
• Finally, know that if your property is currently over leveraged, there are options other than a refinance.