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Tips on Refinancing Conduit Loans

APARTMENT FINANCE TODAY • May/June 2009

BY LES shaver

TODD GOULET, SENIOR VICE PRESIDENT with KeyBank Real Estate Capital, has been getting a lot of desperate calls lately. About 25 percent of the apartment owners who call him are in trouble. “[Owners] are over-leveraged on their existing debt, and it’s a challenge for them to get out,” Goulet says. “I can see why borrowers are becoming concerned.”

They should be concerned—many properties with conduit loans maturing this year will likely not be able to refinance. But that doesn’t mean there aren’t options out there. Here are four tips to help during your negotiations.

1. Start Talking. If you have a maturity due this year, call your lender now. An early jump will help you to identify exactly who owns your loan. In some executions, such as collateralized debt obligations (CDO), the loan could be owned by foreign investors. Of course, the renegotiation will go a lot smoother if you’re dealing with the same people who worked on the origination. But if you’re dealing with special servicers of a CDO loan, keep in mind that any renegotiation has to fall within the original CDO documents.

2. Be Realistic. Most likely, you’ll have to put more equity into the deal when it comes time to refinance. But most owners don’t want to confront the fact that a property has lost as much as 25 percent in value. The sooner you understand that your property is in trouble and start looking for reasonable ways to solve the problem, the better chance you’ll have of saving it.

3. Find Money. Fannie Mae and Freddie Mac are your best bets in today’s market, and they have been receptive to adding mezzanine debt. But mezz rates, currently in the mid- to highteens, might be too onerous. “Mezz debt can strap your cash flow with too much debt,” Goulet says. If mezz proves too costly, equity can be an appealing alternative, especially with a partner you already know.

4. Get Rid of It. If there’s no debt and little equity available— and refinancing isn’t in your future—then you’re probably not going to have the asset in a year. So the question becomes, do you hand over the keys to the bank or give the asset away at a discount? Consider the former, experts say. “If you can sell the property for nothing more than existing debt, you’ll lose equity,” Goulet says. Still, the numbers matter. If your debt on a property is $16 million—while your cost is $20 million—you can sell it for $18 million, then limit your new debt at $14 million, and pull $2 million of equity back. “Selling it and losing some equity is probably a better option than turning over the keys and losing all of your equity,” Goulet adds.