Multifamily operators today are finding themselves playing defense more than offense. They wake up each morning thinking about which fire to put out first rather than how to grow their business. A rising market allowed mistakes to go unnoticed or erased with a refinance or a sale. As Warren Buffett said: it’s only when the tide goes out that you learn who has been swimming naked.
This article offers a roadmap of how to prioritize the important items related to expiring debt today.
Until the laws change to allow rent stabilized owners to raise rents, priority one should be de-risk. I’d suggest looking at your leveraged portfolio like this. Put each loan into its own category and spend your time in priority order.
Priority #1 – Loans With Personal Guarantees. ACTION: Must Sell ASAP:
1a) 90%+ rent stabilized; Get rid of it immediately.
1b) Substantial free market or value add component; Run your value-add business plan by someone you trust to give you an honest assessment of its feasibility and profitability. If the juice is worth the squeeze, implement asap, otherwise sell it.
Priority #2 – Loan Due In The Next 12 Months. ACTION: Be aware but don’t act until priority one is complete:
2a) 90%+ rent stabilized; Get a BOV. Formulate an opinion on where the market will be when your debt comes due and decide if you want to sell it now or wait. Repeat every 90 days.
2b) Substantial free market or value add component; Lower your expectations on future projections to build in a cushion. Decide if the time and effort is worth the work or if your equity can be put to better use in a different value-add opportunity.
Priority #3 – Loan Due In 12+ Months. ACTION: Back Burner
3a) 90%+ rent stabilized; Get a BOV. Formulate an opinion on where the market will be when your debt comes due and decide if you want to sell it now or wait. Repeat every 90 days. These buildings might be worth holding onto in hopes of a brighter future.
3b) Substantial free market or value add component; Do the work, add the value. New York City is resilient and will remain a beacon in the global financial market. You will be rewarded over the long term.
What To Do Right Now:
First and foremost, call your lender as far in advance as possible by involving them early in the process. Make them aware that you are having a cash flow issue impacting your ability to service the debt or that the property will not support a higher interest rate when the term expires. Do not tell them about your problem unless you are prepared to offer a solution. Caution! I would highly recommend your mortgage broker make the first call with you so you don’t accidentally say something that may jeopardize your position.
Lenders will not be eager to drop everything and rewrite your loan but at least you are holding up your end of the bargain in the relationship and acting in good faith. Unless a loan is immediately coming due or the borrower stops paying the loan, the banks have been reluctant to participate in any workout conversations. In essence, until something must be done, nothing will get done.
Many borrowers have expressed frustration with this because the buildings are barely servicing their debt, values are upside down and they would love nothing more than to give the keys back to the bank if only they would take them. This has led the market to a wall of debt maturities and a reluctant lending environment.
What Happens Next?
As I wrote in my September 2022 article, there are three events that are catalysts for sales velocity and we’ve been working our way through each one – SCOTUS, Signature Bank and rates. SCOTUS turned down CHIP v HSTPA but is still considering 335-7 LLC v City of New York and 74 Pinehurst LLC v New York. The Signature loan sale will open up conversations between borrowers and loan servicers. The FDIC set up a loan forgiveness platform by separating each loan into an A and B portion, the latter to be forgiven after property improvements are made. Borrowers will do value add work, have the B portion forgiven and subsequently sell. In October, the 10-year treasury reached as high at 4.97% and within 60 days dropped 100 basis points back down to 3.9%. The market has been volatile and as a result banks have remained cautious and widened their spreads. In a normal market, banks typically lend 150 basis points over the 10 year. Today it’s 250 bps. That tells you about their attitude towards risk which I believe will stay this way for the foreseeable future. The Federal Reserve has remained coy about cutting rates but the decline in the 10-year treasury shows market optimism for 2024 rate cuts. A soft landing is within reach and the market will thaw leading to a very active 2024!
Thank you to my partner, Shaun Riney, for suggesting to cover this topic.