What To Do When Loans Reset At Higher Rates?

The Real Estate Espresso Podcast

The long awaited pull back in pricing for apartments is here. These properties don’t need to necessarily be poorly performing. It’s the properties that were financed with bank debt from small local and regional banks. These smaller banks typically offered loans with a 20 year amortization period and if the loan was written five years ago, the 10 year Treasury yields were pretty low at 0.7%. The loan written five years ago would have been priced in the mid 4’s. Oh, and here’s the important part. It would have been written with a five year term. That means the loan would need to be renewed at current rates in five years and that five year period is up now.

The borrower has the option to renew with the lender at the current rate with a new loan. But at today’s higher rates, even if the property is performing well, the borrower is likely to be forced to bring additional cash to the table.

The situation can be improved by moving out of the local bank financing into agency debt with a longer amortization period. Instead of a 20 year loan, maybe a 25 or 30 year loan will reduce the loan payment enough to make the numbers a little more palatable.

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