Report: $18 Billion in CMBS Face Refinance Difficulties

MBA (5/6/2008 ) Sorohan, Mike
Nearly $18 billion in loans securitized through the commercial mortgage-backed securities market coming due within the next 12 months could face difficulties getting refinanced, according to a new report from Realpoint LLC, Horsham, Pa.
The Realpoint analysis of 75,002 mortgages that serve as collateral for 700 CMBS transactions in the United States found that 6,457 of those loans, representing $73.7 billion or 8.8 percent of the CMBS universe, are set to mature by next March.

Of those, 1,125 loans with a balance of $17.8 billion could face problems because their collateral properties might not generate enough cash flow to support new mortgages that are as big as their existing loans, Realpoint noted.

“Lenders are now more conservative and less generous than they had been in recent years, making all the more likely that those loans could face problems,” Realpoint said. “Also, CMBS conduit lenders are far less active than they have been in recent years, making financing less available.”

On the positive side, the report said because most of the remaining loans were originated 10 or more years ago, when interest rates were higher than they are today, they should have no problems getting refinanced. Those loans have also benefited from a general increase in property values. Other loans were originated within the last three years, generally larger loans on trophy properties and portfolios. Those loans have not benefited from increases in property values, though many do have extension options if performance benchmarks are met.

“Generally, lenders determine the amount of financing they'll provide on a property by looking at the cash flow it generates,” Realpoint said. “They'll usually insist that the property generate annual cash flow totaling at least 120 percent of the prospective loan's debt-service requirement. So a property that generates $1.2 million of annual cash flow would be able to support a mortgage with a $1 million annual debt-service requirement.”

The annual debt-service requirement changes based on a loan's term and its interest rate, the report noted. Most ($10.6 billion) of the loans with low debt-service coverage levels are backed by office properties. But those include several very large loans, one of which facilitated Blackstone Group's $38.3 billion acquisition of Equity Office Properties Trust last year.

The report said $2.3 billion of hotel loans are backed by properties that generate cash flow that is less than 120 percent of the debt-service requirement. “And nearly $2.1 billion of loans on multifamily properties are in the same boat,” it said.