By Tal Bar-Or
While the past few years have been ideal for borrowers to pursue long-term permanent financing, Meridian Capital Group has begun advising clients on different options to address interest rate risk and changing investment patterns.
Today’s floating-rate financing solutions are available to develop, acquire, refinance, and reposition commercial real estate properties nationwide. It has become so popular that there are several dozens of substantial players in the space, as opposed to just a dozen 18-24 months ago.
Lenders competing for floating-rate loans include mortgage REITs, equity funds seeking opportunity in the debt space, and CMBS lenders creating floating-rate buckets. Because of growing competition among lenders, anticipated rates have dropped from the 500s over LIBOR to the 300s over LIBOR.
While multifamily is still the easiest and most desirable sector to finance, Meridian sees that office and retail are no longer right behind residential in this cycle, but rather industrial. Lenders still seek deals in major metros, but will pursue secondary/tertiary cities for deals with strong sponsors and tenancy.
Meridian recently closed on an industrial property in the New York metro that was aggressively bid on by lenders. While the floating-rate loan closed at 85% loan-to-cost, offers came in as high as 95%. The borrower, planning to reposition the property, settled on a three-year term with several extension options, and a rate in the 4% range.
While floating-rate financing is ideal for borrowers with short-term investments seeking prepayment flexibility and potential for interest rate savings, two other borrowing situations have also emerged.
First, there are borrowers who took out a floating-rate loan for 2-3 years and are behind on their business plan. A new lender is more open to the idea that borrowers need more time to complete their work and understand the value being created.
Meridian assisted a client who purchased a foreclosed multifamily property on the west coast of Florida. While the client finished construction on the property and was successfully leasing up the project in phases, the business plan took longer than expected. The client needed another 12 months before pursuing a fixed-rate deal. We negotiated a two-year floating-rate loan to add a year, plus breathing room, until the property is stabilized.
Then there are borrowers who aren’t sure if they want to hold a property or sell it and want the flexibility of a floating-rate loan to avoid a prepayment penalty in the event of a sale.
A Meridian client and their partner purchased an office property in Brooklyn and quickly leased it. With two years left on their loan and meeting all extension qualifications, the client sought out another two-year floating-rate loan that would monetize the upside generated to buy out their partner and allow the remaining sponsor to manage the investment before deciding to sell or own long-term.
Key trends that may impact floating-rate financing is the amount of leverage money center banks are providing lenders, and what happens with yield expectations. For the latter, rates in the mid-500s over LIBOR provided double-digit returns when leveraged, which is more difficult to achieve with loans in the high-300s over LIBOR.
Despite market changes, Meridian continues to analyze client’s objectives and maximize the short-term benefits of floating-rate financing as part of the borrower’s long-term investment and financing strategy.
Founded in 1991, Meridian Capital Group, LLC is one of the nation's largest commercial real estate finance and advisory firms. Meridian is headquartered in New York with offices in New Jersey, Maryland, Illinois, Florida and California. Working with a broad array of capital providers, Meridian arranges financing for transactions ranging from $1 million to more than $500 million for multifamily, co-op, office, retail, hotel, mixed-use, industrial, healthcare, student housing, self-storage and construction properties. www.meridiancapital.com