Northeast Real Estate Business

NOV-DEC 2015

Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.

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Page 47 of 64 Northeast Real Estate Business • November/December 2015 • 47 SUCCESSFUL REFINANCE: START EARLY Borrowers that anticipate the unexpected can position themselves to maximize loan terms. By Brian Sykes N o one can predict the future, but you can prepare for it. That's the advice I always give to investors seeking to refnance their multifamily properties, but it's par- ticularly apt now. There's both change and volatility in the air, making plan- ning imperative. Volatile Interest Rates Interest rates have remained at his- toric lows much longer than most analysts predicted fve years ago. Up- ward pressure has been restrained by a combination of factors that include a slower-than-expected recovery, the strong U.S. dollar, and a fight to qual- ity by global investors. However, few observers consider the current low rates to be set in stone — speculation is widespread that the Fed will soon raise rates, even modestly, for the frst time in a decade. Meanwhile, investors are concerned about interest-rate volatility. Last Feb- ruary, the yield on the 10-year Trea- sury note dropped to 1.68 percent. In June, it rose to 2.50 percent. In the last 12 months, it has not been unusual to see rates jump 20 to 30 bps in the course of a week. For an investor, the signifcance of that rise can be mea- sured in the difference between secur- ing a $10 million loan and settling one that's just $9 million. Both the change in interest rates and their volatility are subject to forces that are impossible for investors to anticipate. They include everything from unseasonable weather and natu- ral disasters, to new disruptive tech- nology such as fracking, and that old perennial, geopolitics. In the summer of 2014, there were undoubtedly very few multifamily investors with the forethought to anticipate the effects of a very cold winter on economic activ- ity during the frst six months of 2015. Uncertain Access to Financing Investors face other issues besides interest rates; events of this past year have underscored the need for inves- tors to concern themselves with the availability of fnancing. Right now, there is a great deal of competition among lenders for clients. The agen- cies, banks, CMBS conduits and life companies are all active, particularly on the coasts. The competition is less intense in the middle of the country, but even in these areas, lenders are pricing aggressively. This contrasts with the slowdown in agency lending we experienced in the spring of 2015. Having exceeded their yearly cap in the frst four months of 2015, Fannie Mae and Freddie Mac raised their loan spreads to slow originations, giv- ing the Federal Housing Finance Agency (FHFA) time to consider its options. Going forward, FHFA de- fned affordable housing — one of the categories ex- cluded from the cap — in ways that increased the number of exempt units excluded from the cap. And while the agencies continued to fnance Class A properties, especially for repeat cus- tomers, they tended to look favorably for the remainder of the year on bor- rowers who included affordable hous- ing in their mix. Here again, it would have taken an impossibly astute investor to an- ticipate these developments. In both cases, prudence dictates that inves- tors seeking to refnance prepare for events they cannot anticipate. The best way to do this is to take an early look at your portfolio. Act Early to Maximize Your Options I advise clients to start thinking about the properties they want to re- fnance at least 18 to 24 months before their loans mature and, ideally, to plan on refnancing maturing loans at least a year in advance. This gives inves- tors the leeway to postpone their re- fnancing if the economic stars are not aligned, an option that would be un- available if they had waited until the last minute to act. I also ask them to consider early rate lock. Early rate lock allows an inves- tor to kill two birds with one stone. It enables them to take their interest rate risk off the table, while allowing them to continue burning off the prepay- ment penalty on their existing loan. The agencies allow you to early rate lock up to 12 months in advance. The early-rate-lock calculation can be a complicated one. Investors must balance the advantages of securing their target rate and reducing their prepayment penalty against paying a higher spread, all in the context of their view of interest rate trends. I think of early rate lock as an insurance policy with some worthwhile provi- sions. The 5 percent cushion built into the agencies' early rate lock program means that lenders can increase or de- crease the loan amount without break- ing the rate lock. In addition, getting a jump on re- fnancing 18 to 24 months ahead of the maturity date on an existing loan gives investors the opportunity to put their fnancial house in order. Lenders pay special attention to an investor's fnancials over the trailing 12-month period before they submit their ap- plication for refnancing. Borrowers should do their best to tell an appeal- ing story. They should take steps to maximize their net operating income, raising rents if occupancy levels war- rant it. They should review their prop- erty's current operations in detail and look for ways to minimize expenses, such as any signs of over-staffng, higher than necessary advertising, etc. And they should address charge-offs for bad debts. Finally getting an early start on re- fnancing will put borrowers in the position to expedite the process of preparing their loan documentation. They can use the time to update their personal fnancial statements and real estate schedule. The bottom line: Given the inevi- table uncertainties in the capital mar- kets, borrowers should do everything they can to maximize the fexibility and speed with which they can react to unforeseen events, both good and bad. Preparing early is the key. Brian Sykes is senior vice president of loan originations with Capital One. Brian Sykes Capital One Events of this past year have underscored the need for investors to concern themselves with the availability of fnancing. Commercial, residential, national and international title 6 3 1 . 4 24 . 6 1 0 0 • 8 0 0 . 2 8 5 .1 5 5 1 • A D VA N TA G E T I T L E .C O M THE ADVANTAGE GROUP: ADVANTAGE TITLE • ADVANTAGE FORECLOSURE • ADVANTAGE LEGAL • ADVANTAGE SETTLEMENT • MORTGAGE ADVANTAGE We work hard every day to make the grade. THAT'S YOUR ADVANTAGE.

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