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.

Over the past few years, lenders have decreased the DY that they use to underwrite loan amounts from the 11 to 12 range to a more generous 8 to 9 range for senior debt. However, even at the lower DY, DY constrained loan amounts are typically in the 65 to 70 percent LTV range not in the pre-crash 75% to 80% range.

Other than the infusion of fresh equity from the sponsor or from an outside investor, a solution to the dilemma of a shortfall in refinance proceeds is to employ structured loan strategies to add layers of subordinate capital. This can be structured as mezzanine debt or preferred equity, and has become a very active area for finance. During 2013, George Smith Partners arranged over $1 Billion of structured debt transactions. With subordinate debt or preferred equity, capitalizations can easily exceed 80% to 85% or more of value. While the cost of the sub-debt is more expensive than senior debt, typically the blended cost of capital adds between 25 to 75 basis points to the overall weighted average cost.

In recent years senior lenders have joined with mezzanine providers to provide “one-stop” financing. This arrangement keeps the borrower from having to negotiate with two separate lenders, which are often times hard to marry together and also reduces the challenge of negotiating intercreditor agreements between lenders. Also, some lenders can originate senior debt for securitization and contemporaneously advance a tranche of mezzanine debt which can be held on their balance sheet.

Gary M. Tenzer is principal and managing director of George Smith Partners Inc. The views expressed in this column are the author's own.