Are deals falling out due to higher rates?

Question

You guys see a ton of deals across several markets and asset classes.  Are deals falling out of escrow or getting re-traded due to higher rates?  Has this bump in rates caused you or your firm to pass on certain deals?

PacNumber · Accepted Answer

Thanks for the input guys.  Would love to hear other stories.

You would think this "Trump Bump" would level off soon.  It's not like earnings are better.  I still feel that even if sweeping tax reform comes that we're still looking at some type of a recession in the next year.  As rates go up things are going to change for a lot of sectors.  If QE slows down too...

I had a client beat me up on Freddie Macs hard costs for a smallish portfolio refi.  The LOI's were issued at 3.9% on 10yr fixed money.  The lender said they would honor LOI's if signed in a day or two.  Borrower balked at fees.

PacNumber · Answer

I'm very familiar with ARM's, caps, etc.  But I'm a mid market guy.  I do a lot of deals in the 2mil to 10mil range.  Not sure what's going on with institutions all the time.

I've discussed LIBOR in previous threads.  Back in the 90's this was a subprime index used on only tough deals.  It's a mainstream index now (clearly).  Back in the day S&L's were so prevalent that they had their own indeces.  Much more stable.  Not the high of highs or the low of lows...like COFI and CODI.

Having tens of millions tied to floating LIBOR would scare the shit out of me.

bd.charlus · Answer

We do value-add multifamily, anywhere from $6 MM to $100 MM+.

There are obviously varying opinions on floating vs. fixed, but we've always preferred floating with caps. We did an analysis of our transactions over the past 20 years and determined that there were only a few instances where a fixed rate loan would have proven more favorable. Taken in the aggregate, it hasn't been much of a debate for us.

Fixed rate loans can make things really difficult when the time comes to dispose of an asset.

brosephstalin · Answer

We always negotiate caps aggressively as it's an easy place to save money. Terms obviously vary by deal, but for a typical floating rate bridge/construction deal (3+1+1 term), lenders will want at a minimum a 3% strike and will always push for a 3-year term. Some will try to push for a lower cap, but the truth is for most lenders it's about checking a box rather than caring about the cap itself, so they will not blow up a deal over it as long as what you're asking is within their general guidelines. The difference between the cost of a 2-year vs.

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Are deals falling out due to higher rates?

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Are deals falling out due to higher rates?

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