How to sell a building today: Package it with cheap debt

Properties with transferable, low-interest mortgages are all the rage

Given how interest rates have made financing a pack of gum a slog, it may seem like an odd time for a commercial real estate deal to shatter a record.

But when Post Brothers marketed a huge Philadelphia multifamily complex, it had an ace up its sleeve: A low-cost mortgage that could be passed on to buyers. Post sold the property to KKR and Mack Real Estate Group in October for $357 million.

Assumable mortgages are now one of the hottest commodities in a tough sales market, giving buyers and sellers more flexibility as financing costs soar.

“As we saw recently with our sale of Presidential City, assumable mortgages can also help to defy the odds and bring deals to fruition despite today’s somewhat volatile market,” said Matthew Pestronk, Post Brothers’ president.

Post Brothers' Matthew Pestronk (Post Brother)

Post Brothers’ Matthew Pestronk (Post Brother)

The fixed-rate mortgage, which Post Brothers had secured when borrowing costs were much lower, was pivotal to KKR completing the deal for the complex of four 12-story buildings, which the private equity firm bought for more than $100 million above the city’s previous multifamily record.

“Without that financing in place, this would not have been a possible transaction,” KKR chief operating officer Billy Butcher told the Wall Street Journal.

Not every property has an assumable mortgage. But in a market defined by high rates, these transferable loans are becoming more visible.

Long Island-based shopping centers REIT Kimco Realty, for example, bought a portfolio of eight retail properties in Nassau and Suffolk counties earlier this month for $376 million. In announcing the deal, Kimco highlighted that it was able to assume the portfolio’s $88.8 million mortgage, which boasts a 4.1 percent rate and has roughly six years remaining.

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Kushner Companies is touting the assumable mortgage it has on an East Village portfolio of 11 apartment buildings that it is looking to sell. Marketing materials show the portfolio has an $85.5 million assumable loan with a fixed rate of 3.34 percent and seven years remaining.

Handing off a loan does come with some challenges. It requires sign-off from the lender, who will want to do a credit check on the new potential borrower.

In some cases, lenders simply won’t allow it. In other cases, such as CMBS loans where it is technically permitted, experts say obtaining permission from the servicer can be so difficult that it’s effectively off limits.

And assumable loans mean the buyer has to accept the financing that’s in place. If property values have gone up, the new owner probably won’t be able to use as much leverage as it would by getting a new mortgage.

Ackman-Ziff investment-sales broker Andrew Sasson said assumable mortgages become more prevalent during down markets, such as right after the Financial Crisis.

“It was an attractive layer to transactions to help them get over the finish line,” he said.

For those who can find them, deals with assumable debt can be a workaround to the high interest rates that have vexed the sales market. Rising rates were to blame for commercial real estate sales in New York City falling 30 percent in the third quarter to $7.86 billion from the previous three-month period, according to Ariel Property Advisors.

Newmark investment-sales co-head Evan Layne said that on top of making a property more sellable, having a low-cost loan that can be passed along means the seller doesn’t have to lower its price to offset the buyer’s financing costs.

“Not only are they more liquid, but your value’s going to hold up as well,” he said.

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MSCI Real Assets chief economist for real estate Jim Castello (Getty Images, MSCI Real Assets)
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