Closing the Ballooning CMBS Gap
Bridge loans can offer some breathing room when coping with troubled assets
By Alex Cohen, CEO, Liberty SBF
A widely circulated research report last year revealed that a massive number of loans underlying commercial mortgage-backed securities (CMBS) will mature over the next few years, sparking a major wave of refinancing demand. Addressing the volume and complexity of that demand will be challenging, but there is one option that should be part of the mix of solutions: the bridge loan.
Boiled down, the report, prepared by Trepp LLC, said CMBS issues peaked between 2005 and 2007. Because 10-year balloon terms were attached to a majority of those loans, the report predicted a cascading “wall of maturities” beginning this year and lasting until at least 2017.
Over that time, in excess of $300 billion in CMBS loan balances are slated to mature, more than double the amount that matured from 2012 to 2014. ”If this data is to be believed, then 60 percent of the entire CMBS public-conduit universe [will be] maturing in the next three years,” the report states.
Much of that CMBS loan pool and other ballooning debt maturing over the next few years will be fine and can find a home in the conduit-lending marketplace, but a good percentage of it is not ready for prime-time financing.
This is where a bridge loan — financing that bridges the gap between loans — comes into play. There are many reasons why a property owner might not have the ability to refinance into a permanent loan and would want to seek out a bridge loan.
Some questions to consider when eying the bridge-loan option include the following:
Does the property have potential?
Many times in the purchase market, investors see possibilities in a property that has yet to reach its potential. For example, a retail property might have become the victim of a disruptive construction project on an adjoining roadway that blocked access, causing a domino effect of increasing vacancies as tenants lose revenue and the ability to pay rent. A bridge loan is perfect for this nonperforming asset, if construction has been completed and an experienced investor group wants to purchase the property. The bridge loan gives the new investors time to lease up the property during a recovery period.
Is the property underwater?
There are a couple of primary options for a property owner when the market value of a commercial real estate property falls below its outstanding loan balance. One is foreclosure, although it’s generally not the most desirable plan of action. The other is to conduct a short sale. Investors can use bridge loans to quickly close such short-sale deals with banks that are eager to remove nonperforming debt from their balance sheets.
Is more than one property involved?
In complicated financing situations, a bridge loan can work to create a debt-consolidation package that’s potentially attractive to lenders. A borrower might need to pay off multiple notes covering more than one property under a tight deadline. In this example, let’s say a borrower has a mixed-use building, an apartment complex, and a retail building with ballooning debt attached to each. Instead of seeking out individual loans, the borrower can use a bridge loan to coordinate a single closing and simplify the mortgage structure. The borrower then has time to secure conventional financing.
Bridge loans are not limited to refinancing expiring debt, however. They also can be used by smart investors to purchase underperforming properties. This is because bridge loans come in a variety of types and sizes, with many specialized products to meet the needs of borrowers. The loans can be either full recourse or nonrecourse, and eligible asset types include hotels, retail, multifamily, office and even mobile-home parks.
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A borrower needs to work with a knowledgeable originator when seeking a bridge loan. These products have many benefits and can help investors preserve equity on a troubled asset. But borrowers should become fully educated on loan parameters before considering bridge financing.
A bridge loan will usually balloon after a very short term, typically 12 months. After that time, the loan will need to be refinanced into another bridge loan or, if the property and the investor are ready, rolled into permanent financing. Also, most bridge loans are interest-only, so the principle loan balance remains the same for the life of the loan, a benefit in environments where the sponsor expects property values to increase.
This article originally appeared in Scotsman Guide.