LOS ANGELES-According to Trepp, an estimated $1.4 trillion in commercial mortgages will mature between 2014 and 2017, and CMBS loans represent about one fourth of the total. Most of these loans were originated between 2004 and 2007, during the rapid run up in values and easy lending practices of commercial lenders in the years before the financial crisis. While many of these properties' values have rebounded to or above near pre-crash levels, many of them are still over leveraged with respect to the amount of financing that lenders will lend today. This is because many of the 2004 to 2007 vintage CMBS loans were interest-only for a portion, or all of their term and were originated at typical LTVs in the 75 to 80 percent range. Thus the real question becomes how will these loans qualify for refinancing?
Before the financial crisis, lenders underwrote loan amounts based upon two key metrics, Loan to Value Ratio and Debt Service Coverage Ratio. However, during the crisis and since, the Debt Yield which is simply the ratio of the NOI divided by the loan amount, has been implemented by commercial lenders as an additional constraint on loan amount. Much like cap rates, which vary inversely with value, a relatively high DY is a more restrictive constraint than a lower DY. Lenders started to employ the DY metric as it became increasingly difficult to determine a property's value due to a lack of arms-length, non-distressed sale comparables. As a result, LTV was rendered virtually meaningless.
With interest rates near all-time lows, the DSCR has not been a constraint on loan amount, post-crash. Similarly, with low cap rates, high valuations and a vibrant market for CRE sale transactions, LTV has become more relevant again as an efficient market for the purchase and sale of CRE has returned. That said, lenders are still holding to their newly found DY underwriting metric to evaluate loans. Debt Yield has therefore become the most restrictive constraint on loan amount.
Recommended For You
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.