Michael Bryant, senior vice president in Dallas for Capmark Finance Inc., and Lance Wright, regional director for Norwalk, CT-based GE Real Estate, say extension requests have been steadily climbing for six months and are certain to continue upward as CMBS loans of recent years come due. The most common request is a one-year breather.
"As each lender reviews the extension request, they're going to look first and foremost at the sponsorship," Bryant says, "and next, the business plan." The common-sense approach still can result in rejection due to today's market conditions, he explains.
"Lenders also are looking at whether the borrower has attempted to get alternate financing or sell the asset. They may make the request because they feel it's the wrong time to sell the asset, but from the lender's perspective, they just want to be repaid," Bryant tells GlobeSt.com. "It has to be a very legitimate reason and make good economic sense for the investment committee to approve the extension."
As brokers know, the buyer-seller disconnect makes it tough to close a deal these days. It's equally as daunting a task to secure new financing, with leverage limited to 60% to 65% and interest rates higher. Regional banks and life insurance companies are trying to fill the CMBS gap on the commercial side while Freddie Mac and Fannie Mae are picking up the slack for the multifamily sector. With options limited and market conditions changing, extension requests are climbing, Wright and Bryant concur.
[IMGCAP(2)]"There's always a hurdle to an extension," Wright says. "But just because you've asked for an extension doesn't mean the deal hasn't worked out. You might just need more time."
The key is whether or not debt service coverage ratio can justify an extension, Wright explains. "A lot of deals don't qualify for the extension test," he says. "And a lot of times, they will have to put in more equity just to meet the test."
Wright says extension options in original loan documents can address future spreads, but really can't lock in much more than that since there's no way to control the Libor or swap index. "There's always going to be a test. The test is what gives the lender the right to say if they want to stay in the deal," he says. "If the borrower is performing as expected, then they'll be extended. You're not giving them more money; you're giving them more time."
Wright stresses that extensions aren't necessarily bad, but instead build in flexibility for borrower and lender alike. In today's climate, it's best to sit pat if there's no pressure to repackage the deal. And if there is, he says "my advice is to start the process early. Don't wait."
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