- The current stress in the economy may put significant pressure on commercial real estate owners who need to refinance their property.
- The options to refinance may be severely limited in the current market.
- But there are alternatives to refinancing that a property owner can explore.
In last week’s article, I wrote a lot about how the outlook for our economy right now may not be the rosiest. And while that’s not a very fun topic to think about, it is best to be prepared for it. And, potentially, take advantage of the opportunities it provides.
One specific area that has tightened significantly is the debt markets. There are a lot of owners that, when they purchased their commercial real estate, had short term debt on it. And that debt may mature soon. But unfortunately it may be difficult for them to find new debt to refinance the property.
So if you are in that position, what are your options? That’s what I am writing about this week.
Owners Have a Few Options if They Cannot Refinance
In some ways, this climate reminds me a little of the 2008 time period. Now, of course, I do not expect it to be anywhere near as dramatic or significant as that time. But there are some similarities. Especially the part where commercial real estate owners had trouble getting access to debt to refinance properties.
You likely recall, at that time there were a lot of foreclosures as banks likely thought they had no choice but to take back the property. I thought this would be an even more attractive option to lenders now because there is likely more equity in the real estate that the bank has debt on. But I recently spoke with a banker and he assured me that the banks do not want to own commercial real estate.
So what does that mean for commercial real estate owners who are facing expiring debt with limited refinance options? There are a few alternatives, including:
- Workouts – Specifically, I mean renegotiating the current debt on the property. This was very popular back in 2008. And still think it’s a possibility because, as that lender told me, the banks do not want to own commercial real estate. So your lender is very likely to work with you in lieu of foreclosure. If it can be done, it is by far the best option because it allows you to keep the property and not have to find new debt somewhere else. I do recommend starting the discussion with your lender sooner rather than later.
- Default – Unfortunately, there are times when your lender just will not entertain a workout. In that scenario, you may need to go into default. That may be the only option that brings the lender to the table. Obviously this comes with significant risk, including but not limited to additional fees, potential foreclosure, receivership, etc. But it may be the only thing that brings the lender to the negotiating table.
- Sell the property – This may not be the most ideal solution because selling a property under duress can lead to a rushed sale for a lower price. But if its your only option, you may not have much choice.
- Bankruptcy – Putting the ownership entity into bankruptcy should be a last resort for any property owner. It may violate the bad boy provisions of the loan and activate a personal guarantee by the sponsor. And the sponsor may have significant difficulty getting future debt for a property. As a result, we rarely recommend this action unless there is significant built up equity in the underlying asset.
Your situation may dictate that there are more options than the ones listed above. But these are a few of the most common choices. And they all assume that you cannot find other debt in the market. And that may not necessarily be true.
I wrote last week that the debt markets have tightened up. And that’s true. But they are not completely frozen. There are alternative debt structures out there that may be able to help with a distressed asset. Some may require a personal guarantee, for example. But at least you get to keep your commercial property.
We have a lot of contacts in the debt world so if you need to find a new lender, please let me know. And also call if you just need some help navigating the world of difficult refinancing and want to discuss your options. We would very much like to work with you to protect your commercial real estate investment.