Wall Of Maturities: Refinancing, Selling Assets With Maturing Debt Is No Easy Feat

As a capital markets and investment sales guy, Michael Fay is no stranger to the challenges of offloading a property backed by a maturing loan. Having brokered thousands of transactions worth billions of dollars in his career, the Avison Young managing director has helped property owners navigate the trenches of refinancing or selling a property backed by maturing debt. 

A massive wall of CMBS loans issued between 2006 and 2007 is set to mature this year, and with banks tightening their underwriting standards, most of those loans will be difficult to refinance and even harder to sell. That is where experts like Fay come into the picture.

Fay, who heads Avison Young’s National Asset Resolution Team, said time is of the essence for these properties. Owners are pressured to refinance or sell the asset before hitting the maturity date, a process that can take months to complete and is a headache to see through.

To get ahead of the problem, many owners are offloading properties at least six months ahead of their maturity date. 

“There are still a lot of loans coming up and a lot of people cannot refinance,” Fay said. “However, they’re selling in advance. It is becoming more and more prevalent now. … A lot of borrowers don’t realize if they miss their maturity date they’re going to have a penalty payment on top of [refinance costs].”

In June, $10B in CMBS loans matured and were in need of refinancing, according to Trepp data. The firm predicts roughly $41.7B in CMBS debt is set to mature between June and November. 

The Challenges Of Refinancing 

Before the financial crisis, CMBS loans had a higher loan-to-value ratio, meaning these loans were generally seen as higher risk. Today, thanks to tight underwriting standards, borrowers are looking at an 80% loan-to-value ratio, forcing them to pay a nice chunk of change out of pocket should they wish to refinance. 

For the owner of a property that is fully occupied and performing well, refinancing the loan before it matures is typically the first option, Ten-X General Manager Steve Jacobs said. 

“I know that if I want to keep my property I need to refinance that, that’s the first option as an owner/seller,” Jacobs said.

Take a property worth $4M. During the pre-crisis era, banks would likely lend $3.6M for a property worth $4M. If owners try to refinance that loan today they would likely get $3.2M instead — which means they would have to pay $400K out of pocket to pay off the old mortgage and keep the property. 

“I would have to cut a check, and I don’t want to cut a check. So then I say, ‘I’m going to sell the property.’ If I can go out and sell it for $4M, I can then pay off my loan for $3.6M,” Jacobs said.

But to sell a property with maturing debt is easier said than done. 

Offloading A Maturing Asset Is No Easy Feat

There are two major challenges on the minds of sellers with an asset nearing maturity.

First, they need to determine the true value of the asset apart from the mortgage amount — this can be a challenge as the goal of selling the property is to make enough from the transaction to pay off the loan. Lucky sellers can even come out ahead, with an asset worth more than the amount of their loan that they get to pocket. 

“You have to make sure there is a realistic perception of value for the owner of the property/borrower, compared to the mortgage,” Fay said. “You have to make sure value is at least the mortgage or more.”

Second, they have to hit the pavement running and market the asset as soon as possible. Marketing a property traditionally can take about six months. This allots potential buyers the opportunity to assess the asset for themselves in a due diligence process to determine its value and whether it is worth the price tag sellers are seeking. 

The challenge is not exceeding the maturity date before closing a sale.

“If they go past that maturity date for let’s say 30 days, there’s another penalty because you’ve missed your payoff date,” Fay said. “You really have to make sure you're doing this in advance of the situation.”

Retrades — A Common Practice That Can Paralyze

In the worst cases, a potential buyer doing due diligence could come back to the seller and say it does not believe the property is worth what the buyer initially offered. This is known in the industry as a “retrade.” Though Fay said this is a common part of the transaction process, it can be detrimental for a seller whose loan has to be paid off in full as soon as possible. A retrade will further extend the negotiation period, forcing sellers to have to approach their lender for an extension, which is more money out of their pockets.  

“If the [buyers] want to buy for a lower price or asks for more time to think it over and close — all of a sudden the seller has to go back to the lender and say, ‘I can’t pay you off on time and I need an extension,’ and if the lender gives you an extension they have to charge," Fay said.

Technology Solutions

In situations such as these, when time is of the essence, going through a third-party online marketplace can be a quicker solution. Real estate tech companies like LoopNet and Ten-X have search engines that can connect buyers with properties for sale or for lease. 

Fay, who oversees the asset resolution team across the country and focuses on selling assets with maturing debt, often uses Ten-X's platform for its speed and virtual selling solution. Ten-X offers an online auction option that streamlines the selling process in a format that takes two months instead of the traditional six. In addition, buyers interested in purchasing through Ten-X’s marketplace put down a 10% deposit that is non-refundable, limiting potential retrades. 

“The reason we use Ten-X as opposed to a traditional marketing program [is because] ... we market the property for 45 to 60 days in advance of the online auction, and everyone does their due diligence ahead of the auction,” Fay said. “The bidders know once they win they have to put up 10% of the deposit [and the deal] closes 30 days later. Basically, you have a gun to your head and have to close or you’re going to lose your 10% deposit."