The global pandemic and economic crisis continue to take hold of New York. While the market is filled with uncertainties, one thing we know for sure is the low-interest rate environment will continue, as the Fed recently announced it plans to keep interest rate near zero through 2023. Now commercial real estate owners are facing the question of whether to take advantage of the low rate and refinance.
On the other hand, the delinquency rate on banks’ commercial real estate loans is at its highest point since 2015. Lenders are focusing on tightening structures across their portfolio and taking a step back on new origination. This trend is more noticeable among the smaller banks, as a larger percentage of their loan portfolio is commercial real estate, and their clients are being more directly impacted. Therefore, borrowers that are looking for loan sizes between $1 million to $10 million will likely feel more pressure from their existing lenders.
Moreover, given the current unpredictability in the market, appraisals have been directly impacted with higher cap rates and larger discounts due to COVID-19. For commercial real estate borrowers with near-term maturities and looking to refinance their properties, a drop in property value across all asset classes also creates challenges for both the borrowers and the lenders in structuring and executing the deals. It becomes obvious that commercial real estate transaction is no longer a straight-up loan-to-value (LTV) ratio play.
Is it still wise for borrowers to refinance their properties?
Our answer is yes.
The sustained pause on the raising interest rate will enable borrowers to refinance with lower rates. Most importantly, this lower financing cost creates the opportunity for borrowers to be better positioned if the economic situation worsens in the upcoming years or poised for growth with a low-cost basis if recovery is faster than expected.
Here are our top tips and deal structures on how to successfully refinance your commercial real estate properties in a challenging environment.
Take a holistic approach to your portfolio
Despite the deals will not be as straight forward as a typical LTV play, there are many creative solutions lenders can do to deliver for commercial real estate borrowers. For commercial real estate owners who have a stable portfolio, it will be recommended to talk to your lender about your entire portfolio. It may make sense to package properties together to structure a better deal and help manage overall portfolio risk.
Just recently, Piermont worked with a family office that owns eight stabilized mixed-use and multifamily properties in Brooklyn and the Bronx. We carved out four of the assets, paid off the existing lenders, and packaged the assets into a portfolio loan. However, we structured it with collateral release provision, so the client has the flexibility with each asset. We work with the client to ensure the appropriate leverage and cashflow and flexibility are aligned with the client’s needs.
Financing a single asset with global cash flow
Taking a holistic approach means not underwriting on a transaction basis, but the borrowers’ overall financial strength. The profile of clients with loan amounts between $1 million to $10 million looks very different from the large developers and owners. Some may have other core businesses and became property owners out of necessity or as an investment vehicle. Leverage your other business assets to offset perceived risks associated with a decrease in appraised value.
In another example, Piermont is working with a client, who is facing a maturity from their existing lender. Taking a single asset stance, the existing lender is concerned with the value of the asset and offered the client a short term, 90-day extension- but expect to be repaid. Piermont took a relationship approach, giving credit to the appraisal and lending off this value, but giving the client additional support by the overall cashflow that can be used to service the debt structure. This gives our client the relief of a refinance, while Piermont has the support of the client’s global cashflow. As a bank who specializes in serving small and medium-sized companies, we’ve learned having a holistic approach allows us to better assess client’s financial strength and come up with a creative solution for their financing need.
Right sizing your bank partner
Since its inception in 2019, Piermont has provided a digitally enabled, high-touch alternative for entrepreneurs, developers, investors and multi-generation family owned businesses who have been looking for a bank that can act fast and deliver solutions. Often overlooked by large banks and regional lenders, these clients have been frustrated by wrong-sizing – using a bank that’s too big for their needs – and challenged by smaller banks with limited options.
Armed with a pristine portfolio and a strong capital position to lend, Piermont has stepped up its support for commercial real estate owners and operators looking to access financing for multi-family, industrial, office, mixed-use, and condo properties. Throughout the Covid-19 pandemic, each Piermont relationship manager issued an average of 7 term sheets per week. Our team has successfully helped countless clients completing new financings.
With our digital platform, our CRE team can turn around credit decisions in three (3) days, open commercial accounts within 24 hours and close a commercial loan as fast as 32 days*.
You can get a soft quote within 24-hours** just by submitting deals directly on https://www.piermontbank.com/opportunity-get-started/
Take advantage of this historically low rate environment for your refinancing needs and discover a bank that’s changing the face and pace of banking. Reach out directly with a deal or contact us at cre@piermontbank.com.
*subject to the bank receiving all required documentation, and the bank is not responsible for any delays caused by the borrowers and other third parties.
**for deals submitting over the weekend or holidays, we will answer within the next business day.