For commercial property owners, few events create more trepidation than having a mortgage balloon payment coming due. This critically timed refinancing can make or break an investment's profitability moving forward.
In today's high interest rate environment, the stakes are even higher for mortgages originated during the historical low rate period of the 2010s. Many owners locked in rates in the 3-4% range and now face a stark rate reality check.
The Impact of Higher Rates While not an exact dollar-for-dollar increase, moving from a 3.5% mortgage rate to 7% effectively doubles the annual debt service requirement. On a $5 million loan, that's an extra $175,000 per year in interest costs alone.
Such a payment jump can quickly turn a positive cash flow property upside down and wreak havoc on debt service coverage and loan-to-value ratios. Lenders get more conservative on metrics like these when rates rise.
Buydown or Bring Cash to Close? To meet underwriting standards, lenders may require owners to buy down their loan balance and re-establish a sufficient equity cushion. Coming up with a six-figure cash infusion is easier said than done for many investors.
Even before getting to that point, an appraisal confirming the property has held its value is critical. Unfortunately, many commercial assets have seen valuation declines over the past couple years.
Options for Owners So what's an owner to do when that mortgage maturity date hits within the next 12-24 months? Here are a few potential paths forward:
Refinance in the Higher Rate Environment If cash flow and value remain sufficient, biting the bullet on a new 6-7% mortgage may be necessary, even if it drastically cuts into returns for the remainder of the hold period.
Sell the Property For owners looking to rotate into lower risk investments or exit a property nearing the end of its optimal hold period, a sale could allow them to escape the higher debt service costs.
Seek Outside Equity Wealthier investors or institutional funds may be willing to inject equity capital into the deal to shore up the debt load. Of course, they'll want to be compensated for taking that risk.
Lean on Experienced Advisors No matter which option is pursued, having the right team of mortgage advisors, appraisers and legal counsel in your corner is invaluable when dealing with a maturing commercial mortgage.
The advisors at Midwest Investment have helped clients all over the Midwest region secure hundreds of millions of dollars in commercial mortgages and refinancing over the past decade through all types of rate environments.
This experience gives them an expansive lender network to leverage in finding the optimal deal based on a property's specifics. Their in-house Certified General Appraiser also ensures the lender gives full credit for the asset's market value.
Start Planning Early With the complexity involved in commercial mortgage refinancing, Midwest's team recommends beginning the process 12-18 months before the loan's maturity.
This provides ample time to shop lenders, order appraisals, evaluate options, line up any needed equity, and negotiate the best loan terms and pricing.
Don't wait until crunch time to start thinking about that looming commercial maturity date, especially in this higher rate environment. The lending market's pace has slowed, so prompt action is required.
Schedule a free consultation with Midwest Investment Advisors' team today and let them put their expertise to work keeping your commercial investment performing at its highest level.
