Interest Rate Increase - Cap Rate Increase - Long Term Leases

mjray87's picture
Rank: Baboon | 111

Curious if anyone holds assets that have longer term fixed leases (i.e. credit office tenants/grocery anchors/etc.) that term out at the same time the underlying debt on the assets do and what your thoughts are on refinancing risk down the road. I know this is a question of inflation effect on interest rates effect on cap rates, but curious if others are getting concerned about exiting via refinance.

We have several holdings that are anchored by longer term fixed leases with credit tenants and were valued at cap rates at its lowest point. Unfortunately we levered 75-80%.

Comments (4)

Jan 9, 2018

err... i think you're going to need, some amortization, rent bumps, or some cash on the side when it comes to refi. If your leases and loans are coterminous that can actually be a good thing. You'll just take it out with a bridge and hopefully market rents will have increased by then and you can make up for any potential increase in cap rates/interest rates. Also could get an early extension from the tenant which would help.

But I doubt you do a single tenant asset that is coterminous with no amortization at 80%... that's just crazy. some would say dumb.

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Jan 10, 2018

The one asset of concern is 50% grocer and 50% in line tenants w/ rent bumps throughout the course of the loan. The grocer, of course, makes up the lions share of the revenue.

If it makes a difference the loan is CMBS. And no, 30 year amortization/10 year term.

Jan 10, 2018

I had a client with two NNN deals...regional grocers with 105 locations. Very well respected. Stores had been in these locations for 20yrs. We had ballooning notes in 2012 and dragged out extensions for 3 years. In 2015, after a long lease negotiation on both buildings, the best we could do was 15 year AM. This is a higher cap market so the deals still penciled. Cash flow was up slightly despite the short term AM. We went from 7.5% 25yr AM to 4.5% 15 yr AM.

We had to book new leases to get the debt, period. It was very stressful.

What do your rent bumps say your future value and DCR would be upon refinance? I have found credit tenants like to renew or extend their leases a year or two in advance. This may help have new leases in place prior to ballooning debt.

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Jan 10, 2018
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