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Borrowers Appeal to Lenders for Loan Extensions as Maturities Approach

It’s happening. There are an estimated $4.4 trillion of outstanding commercial and multi-family mortgages, according to the Mortgage Bankers Association, and $728 billion of them mature in 2023 amid an incredibly frosty financial market. With high interest rates and economic uncertainty, lenders aren’t handing out refinancings like candy, leaving borrowers to scramble for ways to address impending debt repayments. Of course, property owners want to ride out the storm. Few are eager to hand keys back to the lender, walking away with a loss. Instead, a wave of borrowers is taking a let’s-make-a-deal approach with their lenders and pursuing avenues for loan extensions.

Banks are being receptive to loan extension negotiations. They’re not in the business of managing real estate and are reluctant to take possession of properties. In today’s climate, borrowers are finding that banks are willing to extend maturities or provide blend-and-extend mortgages involving refinancing and new terms, however, it all depends on the asset. A long-term relationship with a bank and an extensive track-record of successful borrowing don’t carry an enormous amount of weight in the current financial climate. It all boils down to metrics: debt coverage ratios, loan-to-value ratios, loan-to-cost ratios. For banks, the properties drive the decision-making when it comes to loan extensions because, in the end, banks want to make sure the loan is within their risk profile. The quality of the asset counts, but its performance and ability to recover in the market matter more.

The investors in these properties have to contemplate the same factors as the banks when considering an extension, keeping a focus on the property itself and eschewing any tendencies to incorporate sponsorship status and relationships in the equation. “Investors are sort of looking at it the same way, they’re looking at their fiduciary duty as an investor on which assets they believe can be repositioned, have that next tenant in line, whatever it may be,” said Aaron Jodka, Director of Research, U.S. Capital Markets, with Colliers. “Whereas with other assets, they may decide the value may not be there, at which point they will make the tough decision to part with that asset one way or another.”

Bank loans are one thing, commercial mortgage-backed securities loans are another. While it’s commonplace in the CMBS world for a loan to come with multiple one-year extensions, not all borrowers choose to avail themselves of the extra time when faced with a maturity. Recently, Brookfield opted to forego an available extension on the $350 million loan for the 1.4 million-square-foot Gas Company Tower and World Trade Center Parking Garage in Los Angeles, leaving the office loan to be transferred to special servicing. “There are clear rules to follow when it comes to CMBS,” Jodka said. “If I’m looking to renegotiate my loan, I oftentimes need to default on that loan to go to special servicing to then have my loan refinanced or modified.” The number of properties being transferred to special servicing is on a distinct upswing. The TREPP CMBS Special Servicing Rate jumped 37 basis points in March 2023, marking the largest month-over-month increase since August 2020. Still, obtaining extensions on CMBS loans remains within the realm of possibility. In late December 2023, retail landlord Macerich landed a three-year extension on a $300 million CMBS loan backed by Santa Monica Place, a retail property the company is in the midst of transforming into a mixed-use destination in the vibrant California beach community.

While the property is the key to an extension, certain property types face sector-specific obstacles. In the occupancy-challenged office sector, signs of distress have already begun to appear with more deeds-in-lieu-of foreclosure, modifications, and other loan reworking methods taking place. For owners seeking extensions on office loans, unlike industrial property owners, they don’t have solid sector fundamentals to lean on. Banks’ ability to strike extension deals may be limited by regulatory issues. Regardless, financial institutions are motivated to be flexible with borrowers, but many office buildings just won’t be able to stand up to testing. Inevitably, some office properties will prove so challenged that banks will choose to reclaim them or sell their loans to investors with the capital and wherewithal to reposition the property.

There are issues on the horizon in the multifamily sector as well, predominantly due to rapidly escalating expenses. In Texas and Florida, for example, insurance costs have doubled, tripled and in some cases, quadrupled, resulting in a negative impact on multifamily property values. Lenders won’t look kindly upon a drop in a building’s value when considering an extension. However, borrowers on all asset types may get help in their attempt to woo their lenders for extended maturity dates. Commercial real estate organizations like the Real Estate Roundtable are lobbying bank regulators to reestablish a troubled debt restructuring program for the industry, which would provide financial institutions with added flexibility in working with borrowers on troubled debt restructurings.

The debts are coming due. An additional $659 billion of commercial and multifamily loans will mature in 2024. And still, it will be the borrowers’ properties, not the borrowers, that will need to prove themselves worthy of loan extensions. There’s no one-size-fits-all road to securing a loan extension, but most lenders would rather consider an extension or another workaround than take possession of a commercial building and all the headaches that it entails.   

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