Here are 3 Factors to Hedge Against Interest Rate Hikes from The Fed for CRE with Assumable Loans in 2022 and Beyond

Following up from my information post on assumable loans yesterday, there are some further points I want to make.?Since rate hikes like I said yesterday are anticipated between a minimum of 1 to potentially 7 times this year, if a CRE buyer is going to acquire a property with an assumable loan, they need to factor in hedging against risk of lower valuations due to cap rate decompression and loan maturity default risk.?When I say maturity default risk, I am referring the loan coming due and it is more difficult to pay off the unpaid principal balance (UPB) due to a change of property valuations taking a haircut.?

(1).??

It is wise for any borrower that acquires a property with an assumable loan (CMBS, Fannie/Freddy Mac, HUD), to look at the loan docs and see that there is at minimum IMO that it has at least 5 years left on the note.?Why??A 60 month period from the time of assuming the loan at closing allows for the financial, economic, and specifically the POLITICAL ENVIRONMENT TO CHANGE from now February 2022.??

While I try to keep as much politics out of my posts, I will say this.?Many people aren't happy with the political leadership currently in Washington, D.C.?This is due to supply chain issues, increasing inflation, employers being unable to place workers due to government unemployment aid, etc.?Regardless of your political affiliation, assuming?an assumable loan with at minimum 60 months left on its term schedule, will allow for 3 more national elections to past for the presidency and Congress.?Hopefully, this will allow for pubic policy to change that can affect the economic environment in the CRE sector.

(2).?

If a CRE buyer acquires a property with an assumable loan less than 60 months left on its term they need to take more caution here.??It is vital to see what are the penalties for monetary and technical default.?It is wise to see are there any contingencies to see would the assumable lender allow for the term of the loan to be extended if possible and if so, what would be the cost that the borrower must bear for that.?See what is written in the loan docs and if there is anything lacking hire a competent attorney that specializes in loan docs for CRE and negotiate with the lender to see can any addendum take place if possible.

(3).

Factor in holding for interest only (IO) and amortization period combined if loan docs have a period of 60+ months for loan maturity.?There can be a period for certain loan products that after the IO period, amortization kicks in for a certain period of time.?For a gas station portfolio I had last year summer, I had a CMBS lender give a quote where IO was for 60 months and amortization schedule was for another 60 months.?The loan term was for 10 years.

Many sponsors want to sell or refinance at or before IO comes to an end.?This is due to deductions they can write off for tax purposes.?If it is a property the sponsor has a serious interest in and the note has 60+ months on it and it is partially IO and the rest is amortization based off of a 20-30 year payment schedule, the sponsor needs to factor in underwriting amortization scheduling payments for the hold period and how that will affect investor returns for distributions.