Last month we touched on refinancing our variable bridge debt on our latest acquisition. We were able to protect our original investment while adding value to 12 doors, creating instant equity with our corner property in downtown SLC. We underwrote conservatively and made sure to have enough reserves to see this project through. Remember, we bought this property at a 2021 price with 2022 interest rates.
Unfortunately, not all investors are finding themselves in this same situation when it comes to variable rate debt. Simply put, some have not been able to hit their proforma rents or have had lower occupancy than projected. The overall lack of income to support the asset with today’s terms is a huge challenge. This leads to the next shoe to drop: bridge debt maturing or coming to term. The guarantor now has to find a new loan to service the property/asset. Seems easy, right? Not so fast. Rent prices have not increased as sharply as in previous years effecting the value of properties and less people are moving causing a smaller rental pool. Meanwhile, lenders are tightening their standards, so there is less capital flow.
So what do these investors do? They can ask for an extension on the current debt, but typically that extension is only 90 days. Other options are: forfeiting the property, selling the property, or paying to get into a new loan. Paying to get into a new loan doesn’t mean paying the closing costs, it means paying the difference in what the property is worth today versus what is owed and that may not be a feasible option.
Bought 2021 prices with 2022 debt
How do you avoid these situations and come out on top during these market cycles? Sell when everyone else is buying. Underwrite conservatively; there will always be another deal. Protect your investors by having proper capital structures in place: debt, equity and reserves need to be in proper ratios. Stick to your buy box and only buy properties that meet your requirements. Keep on the look out for when distressed properties hit the market. Contact your lenders, brokers and real estate agents for these leads.
