8A — April 13 - April 26, 2012 — Financial Digest — Mid Atlantic Real Estate Journal
www.marejournal.com
C REATIVE F INANCING
By Bruce J. Coin, Bruce Coin Consulting, Inc. One creative way to refinance a highly leveraged property
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major problem con- fronting the commer- cial or income prop-
ratios, with little or no amor- tization. The interest rates are about the same or higher than today’s rates but with appraised values that were based on high occupancies and higher rents. During the last three years, va- cancy rates increased and rents declined while loan underwriting became more conservative. In combination with the reduced dollars currently available to finance commer- cial properties and in light of the more conservative under- writing standards currently
being applied, prospects for adequate refinancing are often “slim to none” for many commercial owners. Even at a 75% LTV ratio today available market financing is “short” of what is owed and more than a borrower can cover “out of pocket”. Accord- ingly, a time bomb of poten- tial defaults still exists. Drawing on a creative method from earlier times, for the right situation, re- structuring by use of a combi- nation land purchase-lease- back and leasehold mortgage concept can collectively pro-
vide up to 90% (and higher if desired) of current value. It will take a positive at- titude by an existing lender and help from its legal staff but an abundant number of similarly structured transac- tions were successfully used in the late 1960s and early 1970s. It’s an alternative to using a less sophisticated “A” mortgage and “B” piece note structure. The concept is simple, the mechanics complex. The borrower conveys the land to the lender (subsidiary or holding company) at ap-
praised value (or negotiated value) and leases it back on a long term basis at a fixed rent. Simultaneously, a 10 year balloon, leasehold mort- gage is provided at 75% LTV of created leasehold value. If the lender doesn’t want to hold the land they can sell it to others based on the rent contract in place as it is “prior” to the mortgage. If the lender and borrower believe that over time, vacan- cies will diminish and values will increase (which is highly likely) this is a solution that can allow a deserving bor- rower to retain ownership, and not need to acquire an expensive mezzanine loan or partner. They can earn their way out of their current difficulty by a combination of goodmanagement and an im- proving economy. The lender may ultimately be fully re- paid and the structure will give the lender more control and options in the event of a material default. The ground lease must contain a repurchase option that gives the borrower the right to repurchase at any time during the first 10 years for the same price. The op- tion can contain a provision that the ground may only be repurchased simultaneously with the prepayment of the leasehold mortgage. Lever- age clauses can be incorpo- rated to force the borrower to ultimately repurchase the land and repay the financing within 10 years. These can include; loss of the purchase option; the option price and land rent escalating signifi- cantly no “assumability of the leasehold mortgage, no refinancing of the leasehold mortgage and others. Over 10 years the typical leasehold mortgage will am- ortize by about 23 percent. If the land purchase represents about 20% of the new “fi- nancing”, and the mortgage another 70%, such amortiza- tion will equal about 16% of today’s overall value afford- ing a good opportunity for this to succeed. Unfortunately, space here does not permit discussing all of the possible factors, structures, clauses and as- pects to consider but hope- fully you get the idea. Bruce Coin is director of Bruce Coin Consulting, Inc. ■
erty financ- ing industry is finding a way to ad- e q u a t e l y r e f i n a n c e t h e p r e s - ently highly l e v e r a g e d proper t i es that were fi- nanced 5 to 7 years ago. Of most concern are bank and CMBS mortgages. Many were written at 80% LTV Bruce J. Coin
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• Analyze, Underwrite and Value Income Property (apartments, office, retail, industrial flex, other) • Income Property Lease Analysis • Direct Capitalization and Yield (DCF) Capitalization • Typical Mortgage Commitment Clauses • Construction Lending Basics • Structuring Joint Ventures and Participating Mortgages • Financing Properties with Prior Ground Leases • Net Leased, Single Tenant Credit Financings • Credit and Non-Credit Tenant Financial Statement Analysis • Commercial Appraisal Review
Bruce Coin is the former co-founder and CEO of Pro-gressive Mortgage Corp. He is an acknowledged commercial mortgage financing and property valuation expert with over 40 years of experience. He has lectured to classes of the University of Pennsylvania’s Wharton School, and has written for, taught, and addressed many special interest groups including banks, law firms, appraisal organizations, commercial real estate organizations and private real estate companies. He is an IDECC Certified Distance Education Instructor (CEDI) and has written numerous courses about commercial real estate, finance and appraising. Bruce currently holds Certified General Real Estate Appraiser certificates in PA, NJ and CA.
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