The Tool-Box: Condominiums and Maturing Commercial Real Estate Loans

You have no doubt heard (Click here to read: MBA Tracks $380.6B of 2012 Commercial/Multifamily Loan Maturities) about the volume of commercial loan maturities over the next 2 to 3 years.   These loans must be refinanced, but the difficulty with refinancing, of course, stems from lower asset values, tighter underwriting requirements, and a smaller lender market.  The math is pretty straightforward:

In a typical situation, a building that was worth $100 million in 2007 was financed with 80 percent debt, or $80 million.   Now the loan—which was interest-only, meaning no principal was paid—is maturing.  The borrower owes $80 million, but the value of the property has also dropped, to $80 million. This means that the ratio of the loan to the value of the property is 100 percent.  Lenders have little appetite in this market environment for highly leveraged loans, so in one increasingly common outcome, the borrower will recapitalize the property by finding an equity partner to inject new capital into the deal, thereby lowering the overall amount of debt on the property.  (Click here to read:  Anxiety Mounts Over Maturing Real Estate Loans)

I am not about to tell you that condominiums can solve this problem once and for all, but I will tell you that for some mixed-use vertical projects segregating different uses within the project through the condominium form of ownership might give you a few new options.  Let’s take a look at two projects here in Austin: Block 21 and 360 Condominiums.  Block 21 is a mixed-use vertical project with 5 discrete uses:  hotel, residential, office, retail, and an entertainment venue.  360 has 2 discrete uses: residential and retail.  Each developer elected to segregate each use into a single master condominium unit.  Why?  The principal reason is that each use is now legally capable of being sold, separate and apart, from other uses.  Does use segregation mean you can solve a refinancing problem by selling a use and releasing capital?  Maybe, maybe not—but without segregation banish the thought!