Hey, I need some help regarding a commercial real estate mortgage. So basically there is a property worth around $4.5 million and there is a $3 million mortgage on it. The property is making significant NOI, but unfortunately the principal and interest payments, mixed in with a poor economy, the business is breaking even. My goal is to payoff the entire mortgage, by bringing in an equity investor. The investor would be a silent partner, but would be entitled to 50% of the net income. Even though the investor is contributing more in equity, they will only get 50% because they won't have to worry about day to day operations. All they have to do is collect their share of the money.
We have owned the property for more than 10 years. I figured I would ask you guys where I would look. What companies specialize in buying out mortgages? Are the terms I provided reasonable. I know many of you guys are experienced in this and I would appreciate any help you can provide.
Are you sure it's worth $4.5m? Have you not tried to just refinance at a lower rate/longer amortization? I don't see how this is less desirable than giving away 50% of cash flow.
If you truly have exhausted your options, it might be tough to find that sort of investor/lender given how small the loan is.
Yes we refinanced, and have a fairly low rate already. Honestly, we could push back the amortization, but we really want to clear the property from any debt so we can focus on other RE opportunities. Do you know the types of companies that specialize in buying out mortgages? Or essentially becoming silent investors in RE projects?
The guys that do this want a high return (and again, $3m is too small for them). The money is not going to be cheaper, it is DEFINITELY going to be more expensive than what you are already paying. I'm not sure how this deal makes sense or why you want to pay off the loan. Is it because it's recourse?
Well we have positive debt service coverage, around 1.10 DSC. So we have very little cash flow after making payments. What are some strategies for debt restructuring I can look into? You are right, equity is more expensive that debt. I honestly would like the DSC to be 1.25. Also is it possible to re-amortize the loan again. By this I mean, the term loan was for 20 years, we took it out in 2007, so it will mature in 2027. Would it be possible for me to go to a bank and take the outstanding balance of the loan and start the process over again? So lets say I go back to the bank in 2013 and do a 25 year term loan. The loan is now due in 2038, but my monthly payments are significantly less and I can easily make the payments now and still have plenty left over. Is this possible?
A couple things... Why are the operations performing poorly? Switching management companies may help. Also, have you thought about a Supplemental loan? Get about a million bucks at a really low rate on the same payoff schedule. This cash could help you in any short term crunches. I would do everything possible to keep out the equity investors. Those guys are looking for reasons to take over the entire property.
Yea I thought about the equity investors and its not a good idea. What do you guys think about re-amortizing the loan for 20/25 years? This would reduce my monthly payment significantly. I made an amortization schedule for it and my monthly payments would go from $27k to $18-$19k. So yearly I will add more than $85k to the bottom line. Is this a good idea? Is it worth doing?
I like the idea. Also, what is your property management fee? I routinely see people getting screwed paying 4-5% when they could be paying 3.5%...Big difference in improving NOI.
We personally manage the property, so we don't have to worry about that. Seems like its pretty tough to get a 25 year term loan for CRE, I hear banks only do 20 years tops.
What is your objective for the property? Why so adverse to keeping cheap debt on it? Don't know what type of property this is but what you're more likely to get is 10-15 year max term and 25yr amort.
1.10 DCR isn't horrible, but it doesn't leave a lot of room for error. This seems almost insultingly obvious and no doubt you've looked into this, but I'd try raising rents, adding other sources of revenue and cutting costs. For example, a 5% increase in rents could increase the DCR to 1.15 or thereabouts (dirty numbers). I have no idea what type of property you have, but let's say it's multifamily--perhaps you could add vending machines or laundry machines or up your application fees. So increasing rent and seeking new sources or revenue could possibly get you up into the 1.18 DCR range, closer to that healthy 1.20+ mark.
You could also seek to cut some costs. Perhaps you don't need a full time maintenance supervisor and it would be cheaper to hire a 3rd party contractor. Perhaps you don't need to pay for cable TV in your office that drones on during the day in the background. Perhaps you have a super energy inefficient boiler system that could use some capital expenditures to get it running efficiently again. Maybe there are obvious office expenses that could go, or an employee who isn't completely vital. Perhaps you could do a better job of turning units quicker so that there is less idle time of lost rent between move outs. There are all kinds of ways that you can cut expenses that wouldn't necessarily make a materially bad impact on operations. This could take you to the 1.20+ DCR range.
Debt is so much cheaper than equity, especially in today's market. It would be utterly foolish to seek out an equity partner for any reason other than urgent need. Increase revenue and decrease costs.
1.1 dcr doesnt sound like a great a deal to me. Just sell the thing unless you expect some wicked appreciation down the line (rents @ 40% of market or something)
With cap rates where they are and with the OP having a pretty great interest rate historically it's not going to be easy to find a quality piece of property at a much better return. Any A-rated property is going to sell at a pretty solid premium right now. If the OP wants to go dumpster diving in Baltimore or Oakland maybe he can get some better returns.
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