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Don't Fear the Floater

The good news for borrowers of distress backed by floating-rate loans is that the economy struggled enough to allow cheap yield, allowing for more capital…

By Robert Carr - Midwest Region Editor for GlobeSt.com and Real Estate Forum. | Updated on December 09, 2011

The good news for borrowers of distress backed by floating-rate loans is that the economy struggled enough to allow cheap yield, allowing for more capital infusion into improving the properties and refinance potential. The bad news for these owners of still-unstable properties, and the investors who back them, is that many of these loans were taken out just prior to the recession and are now seeing maturity, along with likely default and loss of equity.

According to the Mortgage Bankers Association, almost one-quarter of the $190 billion of floating-rate CMBS loans will come due in 2011 and 2012. Most of the $1.4-trillion balance of outstanding commercial/multifamily mortgages, in contrast, is in fixed-rate loans that mature later, starting in 2015. Floating-rate loans, generally issued for distressed assets, are a greater risk to all concerned than fixed-rate debt. The borrower is taking a chance that rates will stay low enough to provide a favorable rate of return, as well as being low enough for the borrower to spend capital to improve the property. The primary lender risks that the borrower has sense to handle the site smartly, and the investor realizes that though these loans offer greater returns if interest rates rise, they are typically taken out for underperforming assets, allowing for possible near-total loss of capital.

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