Over the last six years, owners have enjoyed considerable appreciation in the multifamily sector of commercial real estate. Fueled by historically low interest rates, below average down payments, and accelerating rental rates, it appeared that there was no ceiling for this sector.
Fast forward to 2023: rents have tempered, interest rates have increased in some cases by 3 times the historical lows, and lending has become tight.
Unfortunately, several of our owners who anticipated interest rates staying low and are now highly leveraged, are being forced to make a difficult choice… should I sell or should I refinance?
Case Study #1 – Refinancing
Client who has owned a multifamily property for 20+ years, with a note coming due
Pro: He was able to refinance the remaining debt on the property due to his significant equity in the property.
Con: His debt service payment jumped from $22,000 per month to $60,000 per month.
Conclusion: Overall refinancing was the right choice. On this particular property, $60,000 per month was easily absorbed by his current NOI since he was already cash flowing so well on the property.
Case Study #2 – Automatic Rate Adjustment
Client with an adjustable interest rate
When the rate adjustment occurred, it caused the monthly debt service to increase from $18,000 per month to $40,000 per month.
Conclusion: In this case, refinancing caused the owner extreme hardship. Not only is he no longer cash flowing on the property, but he is now operating on a significant negative monthly cash flow. There is a good chance that the owner will be forced to sell the property or potentially hand the property back to the bank.
Case Study #3 – Joint Venture
Our third case is slightly different. We had an owner with a large amount of equity and a note that had matured, the extensions were extremely costly so the owner was on a time crunch. In this case we were able to help bring together a group of investors to create a long term debt solution for the situation.
We are encouraging our clients, and owners that we speak with to keep close track of their maturity dates. Especially owners who bought their properties on three or five year notes in the last few years.
If you have a note nearing maturity in the next 6-18 months, now is the time to start reviewing the available options and choosing the best possible solution for your financial situation.
Need assistance? Reach out and let us help you!
SVN Cornerstone Multifamily Team
Nate Gant is an Advisor with SVN Cornerstone. Nate has been an active member of the Eastern Washington real estate community since 2010. He has brokered more than $100 Million in real estate transactions, specializing in land development, REO and investment properties. To get in touch with Nate, email nate.gant@svn.com or call 509.993.4440.
Jordan Lester is an Associate Advisor with SVN Cornerstone. Jordan served as a brokers assistant for 3 years with SVN Cornerstone before becoming a full time broker. Jordan specializes in the multifamily sector of commercial real estate. To get in touch with Jordan, email jordan.lester@svn.com or call 509.496.6922