Don’t Panic! Make Money on the Buy

$560B of Commercial Real Estate loans are maturing over the next 12 months and the common story in the press recently is all about panic, using terms like “looming” and “crash.”

Adam Sharif, Founder and Chief Strategist for nxtCRE – a Miami based open-bank fintech serving CRE lenders -- says that the entire premise behind the perceived challenges of refinancing maturing CRE loans is wrong: “For starters, CRE loans are not a monolith or a widget. Each one is very different and CRE borrowers have options.”

Statistically, 75% of CRE loans are paid off by the sale of the property, not by a refinance. Other than short-term loans such as bridge or construction loans, maturing loans are aged. That means time has reduced the principal amount of the loan and, even in today’s market, the property value has also increased. Office properties in certain markets are often the exception to that rule.

Maturing loans frequently have a ‘loan-to-value’ (LTV) below 50%. This means property owners have options and the lender has little to no pressure to rework the loan. The options for the property owners are either to refinance or sell. Both options have issues.?

Refinancing with a short-term loan is very expensive today and potentially not as available. Refinancing with a permanent loan locks in borrowers’ equity for a long term. Meanwhile, investors don’t want to sell in a down market. But neither of these options are the lenders’ problem. Borrowers have too much equity in those deals to give them back to the lender.?

On the other hand, funds from two-thirds of CRE property sold are used to purchase new commercial real estate. The downside of selling in a down market is also the upside of buying in a down market. In CRE, you make money on the buy.

The lesson here is to sell and reinvest.

#CommercialRealestate #crefinance #MaturingLoans