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HARD CASH

REFINANCING PROPERTY ISN'T EASY THESE DAYS, BUT IT'S NOT IMPOSSIBLE EITHER

By Dees Stribling

It isn't being called a credit crunch for nothing. Borrowers, including those looking to refinance debt on shopping centers and other properties, are now facing a much tougher environment than they were even six months ago. "Some owners looking to refinance are a little shell-shocked at this point," said Charles Krawitz, a managing director at KeyBank Real Estate Capital. "Until recently, they were under the impression, and for good reason, that when their loan came due, they could enjoy a tsunami of money at their door. There's definitely less capital available these days." And yet there is some for refinancing, he says. "A number of lenders have sidelined themselves, but many are still in the game. It's just a different game, that's all."

David Brockmyre, the director of the western Michigan office of mortgage banker firm ICap Realty Advisors, agrees. "Lenders are still looking to do refinancing deals, but the freewheeling days are over," Brockmyre said.

Commercial real estate lending patterns support that assessment. For the third quarter, commercial real estate loans nationwide fell 4 percent year on year across all types, according to the Mortgage Bankers Association. More telling, commercial lending dropped 30 percent between the second and third quarters.

Third-quarter loan originations for retail properties fell 20 percent year on year, and a whopping 43 percent versus the second quarter. The drop in lending for retail was neither the largest among property types - hotels suffered a 72 percent dive between the second and third quarters - nor the smallest, with office properties and industrial properties seeing decreases of 37 percent and 13 percent, respectively.

Commercial-mortgage-backed securities have taken a real thumping, in the form of a third-quarter loan-volume drop of 66 percent versus the second quarter. All the other major types of loan originators -Fannie Mae and Freddie Mac, life insurance companies and commercial banks - actually saw lending volume rise, though underwriting standards have tightened and the cost of capital has gone up across the board.

In other words, CMBS lending cratered last year, a circumstance that was at the root of a major story in retail refinance that unfolded in December. That month Australian-listed property trust Centro, among the largest retail owners in the U.S., found itself unable to refinance a very large amount of short-term debt.

Over the past two years, Centro made major retail acquisitions in the U.S., including the purchase of Heritage Property Investment Trust in 2006 and of New Plan Realty Trust, a REIT that owned nearly 500 neighborhood shopping centers in the U.S., in 2007. In doing those and other acquisitions, the company incurred some A$1.3 billion ($1.03 billion) in debt and about A$1.4 billion in joint venture funding, with a year-end 2007 maturity date on both.

"It's fair to say that the conditions around the world in the credit markets have made it difficult to refinance maturing debt," said Centro CEO Andrew Scott in a conference call in December. (Scott resigned as CEO of Centro as this story went to press.) "We took the view that the long-term refinancing of our debt obligations would be available at attractive terms through the U.S. CMBS markets. We therefore never expected, and it couldn't be reasonably anticipated, that the sources of funding available to us, and to many companies, would shut for business."

As the CMBS market imploded, Centro approached the banks. "But that market has also tightened significantly, even further in recent weeks," Scott said. Just before the conference call, the company canceled dividends for the second half of 2007.

The Australian Securities Exchange-traded stock plunged when investors got wind of the problems, but Centro did manage to negotiate an interim extension on the debt through the 15th of this month. The company was insisting at press time that it had plenty of bidders for its properties.

Owners of smaller portfolios, or even of single properties, are unlikely to face problems as dramatic as those of Centro, says KeyBank's Krawitz, who specializes in originating loans averaging $1.5 million. "The refinancing of smaller neighborhood centers, for example, probably won't be as much affected by macro forces as the refinancing of larger portfolios," he said. "Still, smaller borrowers, like any borrowers, now face more scrutiny by lenders on every deal, both from a credit standpoint and the ability to sustain cash flow. Lenders are lending within perimeters that are more in line with what's prudent on a historical basis."

This means there will also be an emphasis on the historical performance of the properties in a portfolio, along with far less tolerance for underperformers, he says. "The cost of refinancing is going to be higher, and borrowers will have to be prepared to accept loan structures that include some amortization," Krawitz said.

Such conditions might not really represent a radical departure for small borrowers, however. "Concessions for some borrowers have been too generous, but the small borrower never got all these concessions anyway," said Krawitz. "Things never went to the extremes that they did with the larger loans."

ICap's Brockmyre posits that a flight to quality is already under way among lenders looking to stay in the retail refinance business. "Centers are definitely going to be scrutinized more closely," he said. "But when a lender finds a strong center with a strong tenant base, it's going to pursue that deal aggressively. There's going to be some competition to lend to high-quality properties and high-quality tenants."

Fewer deals, more-stringent underwriting, a focus on quality - will this be the toughest year in recent memory when it comes to retail refinance? "Actually, 2008 could turn out to be a relatively good year to refinance a retail property," said Krawitz. "Interest rates remain historically attractive, though not as low as recent years, and retail fundamentals are still fairly strong."

In fact, borrowers might want to refinance sooner rather than later, if possible, he cautions. "If consumer spending wanes later in 2008 or in 2009," he said, "it will affect retailers, causing vacancies in some properties, making refinance an even tougher proposition."