Owners rush to refinance construction and variable-rate loans

Publish Date: May 08, 2013

Topics: finance, refinance, reit, vestar


The U.S. retail real estate sector is witnessing something of a refinancing boom. From Irvine, Calif.-based Johnson Capital last year arranging a new $2 million loan for a shopping center in Salem, Ore., to Santa Monica, Calif.-based The Macerich Co. closing on $700 million in financing deals in the first quarter of this year, the deals keep coming.

Low interest rates are driving much of this activity. Many owners are also converting outstanding, variable-rate loans to fixed rates. In addition, some developers are looking to replace lingering construction loans for projects built before the Great Recession.

Refinancing was scarce in the 2006-2007 period as many smaller, independent owners struggled to stay current on construction loans, says Michael Strober, a senior vice president with CBRE’s Debt & Equity Finance group. “All of sudden leasing has improved drastically, so independent developers can now get enough debt from lenders to pay off the construction loans,” he said.

A good example of this phenomenon is Phoenix–based Vestar, which has refinanced two Arizona properties in the past 60 days. The first property is the Queen Creek Marketplace, a 686,000-square-foot Target-anchored center, and the second is Oro Valley Marketplace, a 521,000-square-foot, Wal-Mart-anchored power center.

“We had construction debt with plenty of term left from old development deals,” said Ed Reading, vice president of finance at Vestar. “But these are assets that need three to five years before they are going to be stabilized and rather than taking on interest rate risk we were able to effectively lock rates, in one case, five years, and in the other case, seven years.”

Although the older loans were variable, Vestar got a better interest rate with the new, fixed-rate loans because the existing debt had a “floor.” According to Reading, Vestar locked rates 65 basis points below the existing loan at Oro Valley and 120 basis points below Queen Creek’s existing loan. One of the transactions was done with a bank and the other a life company. Secondly, Vestar put more equity into the projects so the new loan amounts were less than existing loans. Vestar liked these deals so much, in the same manner it will be refinancing a third Arizona shopping center in Peoria.

What’s interesting is that the trend does not just include the developers seeking refinancing, but also lenders that are looking to keep good developments in their portfolios.

Earlier this year CBRE’s Strober brokered a permanent, $15 million refinancing for the Crossroads Shopping Center in St. Petersburg, Fla. “We had two more years left to the original loan maturity and the lender, an insurance company, knew this was a prime property and didn’t want to take a chance on someone else doing the refinancing,” he said. “We made a deal to forgive the penalty and refinance a year-and-a-half early.”

It’s not just the independents that are refinancing. Many real estate investment trusts were doing acquisitions with lines of credit during the recession. Now, it’s time to acquire new properties and capital needs to be raised. So, the REITs are pooling assets and doing refinancings at 3 percent for six or seven years, Strober says. For its part, General Growth Properties completed approximately $1.5 billion of secured financings during the first quarter, lowering the average interest rate approximately 150 basis points from 5.09 percent to 3.61 percent and generating $680 million of net proceeds after repayment of existing mortgages.

In all this refinancing exuberance, there are some extrinsic considerations. Many developers are hoping to refinance, lease up, and then sell these retail assets. So, they have to be careful about fixed-rate, loan maturities because many buyers want unleveraged properties, Strober says. “Instead of a 10-year deal, you may want to do three- or five-year, fixed-rates,” he said. “In the future some REITs will be buying all-cash.”

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