Section 10 • Finance
larger deal size, generally north of $10 million in value, to ensure profitability and account for fixed administrative costs. For smaller deals, other financing vehicles exist, such as hard
money loans, which tend to be more costly at 10 percent-plus rates. In some cases, the borrower may have to contribute ad- ditional equity to make up for the new debt shortfall. Although generic and based on the assumptions used, this is
a realistic scenario a property owner could face if there is a nega- tive shock to cash flow or value.
To qualify for a loan modification or
restructure plan on a CMBS loan, borrowers must be able to demonstrate that the current
cash flow from the property is not adequate to support the current debt service payment.
Loan Modifications, Workouts And Restructuring For borrowers faced with more serious problems when mez- zanine lending is not a viable alternative, a loan workout may be the only possible solution. There are a variety of options the lender may deem acceptable, depending on the specific situa- tion. Examples include payment modification, interest rate re- duction or principal balance reduction so that the borrower can make his or her monthly payment. More dramatic shortfalls may require a discounted payoff,
note sale, or short sale to recapitalize the lender and avoid fore- closure proceedings. It is often in the borrower’s best interest to cooperate, because potential future lenders view this positively. For workouts of CMBS debt, the structure is slightly more
complicated because they involve several more parties and in- terests. The approval authority required on specialized matters such as loan assumptions, modifications, and restructures typi- cally does not fall under the jurisdiction of the day-to-day loan servicer. The “special servicer” handles this role. If you need to restructure a CMBS loan, it is critically important to understand the objective of the special servicer, who has a fiduciary duty to make decisions that will be in the best interest of all the classes of bondholders. To qualify for a loan modification or restructure plan on a
CMBS loan, borrowers must be able to demonstrate that the current cash flow from the property is not adequate to support the current debt service payment. Once the master servicer has made that determination, at their sole discretion, they will then
Cash Flow
Origination $2,000,000 Current
$1,900,000
Cap Rate 7.50% 8.00%
106 Self-Storage Almanac 2015
$26,670,000 $23,750,000
LTV 80% 70%
transfer the loan to the special servicer, who may then be willing to consider a restructure or payment modification. For self-storage owners with maturing loans, the guidelines
bring good news assuming they have sufficient cash flow to ser- vice the loan’s debt. It’s important to remember, however, that the above scenarios may or may not apply to an individual situa- tion, as every loan will have unique attributes that will affect the lender’s perspective and require specific negotiation.
Mortgage Brokers, Consultants And Intermediaries The expertise of a professional intermediary, such as a mortgage broker, can make a significant difference to the financing or loan workout process, especially during times of volatility in the capi- tal markets. A broker’s knowledge of lenders and loan programs in the market, as well as the associated underwriting practices, can often assist a borrower in locating qualified capital sourc- es, such as banks, insurance companies, or even newly formed funds of which the loan applicant may be entirely unaware. Bro- kers often have access to lenders whose programs may not be accessible at the retail level, or they may possess the knowledge to reach different sources of capital that exist within a given fi- nancial institution. Finally, most professional intermediaries can help to properly
package, present, and structure a transaction in a way that helps a financial institution efficiently digest and understand the asset at hand. Lenders faced with an inbox full of potential transac- tions are more likely to react to a succinct, understandable pre- sentation of the financial performance of the property. Sourc- ing funds is a full-time job, and often a broker can help achieve a more favorable execution for the borrower and facilitate the most challenging deals to completion. Sustained growth from 2013 in the lending markets and even more aggressive lending in 2014 have made the effects of the fi- nancial meltdown a thing of the past. The New Year will continue to ride the wave of economic growth in 2014; however, the un- certainty of when the rates will start to rise should keep volatility common in the markets. Banks have ridded themselves of many of the troubled loans
Table 10.3 – Equity Gap Example Value
that made them hesitant to lend over the past several years, re- sulting in more liquidity in the capital markets and creating an environment for new construction lending to begin. The CMBS market is aggressively competing to win business even in sec- ondary markets and at lower loan sizes. There is also a trend toward less stringent underwriting standards, which allows for higher potential loan dollars. Equity players are active in the mar- ket and seek profitable ventures for those in need of recapital- ization. All of this is positive
for
Loan Amount $21,330,000 $16,625,000
Balloon Balance (Year 5) $19,590,000
$2,965,000 Shortfall or self-
storage owners who are looking to acquire new facilities
refi-
nance their existing properties.
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