Colorado Real Estate Journal - August 19, 2015
It’s a great time to refinance a retail project. If you don’t believe it, just ask Michael J. Salzman. Salzman, a vice president of loan production at the Essex Financial Group in the first half of the year, refinanced more than $100 million in debt on about a half-dozen retail projects. Together, they have about 750,000 square feet. They range in size from 42,000 sf to 310,000 sf. The properties were 10 to 20 years old. Most of them were along the southeast corridor or in the southwest part of the metro area. They included grocery-anchored centers, power centers and neighborhood centers. One, a power center in Littleton, has a grocery-anchored component. One center was in Seattle. “The majority, over 90 percent, were local,” Salzman said. More than half of the loans were made by life insurance companies and the others were commercial mortgage-backed securities loans. A lot of 10-year, CMBS loans were made by Wall Street in 2005 and 2006, before the financial meltdown occurred, Salzman said. “2005 and 2006 and even 2007 were big years for debt origination and we all know what happened after that,” Salzman said. Owners who were able to hold on to their properties during the Great Recession couldn’t ask for a better time to refinance, considering how low rates are today. Salzman refinanced the properties from “the high 3 percent range to the mid-4s,” he said. That was below the initial rates. The rates range from the high 3 percent range to mid-4.5 percent. “The rates they locked in from 2005 to 2007 were certainly higher,” Salzman said. He said many of today’s retail property owners would rather refinance their properties than sell them. It is especially difficult to find other properties in 1031 exchanges in order to defer capital gain taxes on the sale, he noted. “Of course, it really depends on the long-term strategy for the asset and the borrower holding period,” Salzman said. H o w e v e r, he said that given the owners may want to sell the asset at some point, the interest rate is not the only consideration. “Part of the consideration is the prepay structure,” Salzman said. “A lot of borrowers want the prepay flexibility,” in order to avoid paying a penalty if they do decide to sell, he said. That is especially important for value-add investors that are buying older retail properties with the idea of renovating them, stabilizing the rents and tenants and then selling the properties, he said. A decade ago, when Wall Street financed many retail deals with CMBS loans, many borrowers were unhappy with the service they received from them. Essex, he noted, now offers servicing of loans. “That is one-stop shopping for borrowers,” Salzman said. “Essex currently is servicing $4 billion in loans,” he said. Most of it is currently for life insurance loans, but increasingly it also is servicing CMBS loans, he said. Essex and other companies provide servicing both for loans that they place, as well as third-party loans. Salzman does not see any slowing of lender interest in retail properties in the Denver area. “Lenders are being very aggressive right now,” Salzman said. “They have plenty of money to lend,” he said. At the same time, lenders are not just throwing money at deals, the way they were before the financial meltdown. “They are being very judicious about the deals they are doing,” Salzman said. For example, if the loan represents a large amount per sf, it must be justified. Lenders also look at rent rolls carefully. Lenders tend to like it when current tenants have a number of years left on their leases, because that provides a stable cash flow, he said. However, at the same time, owners have an opportunity to replace existing tenants with tenants that will pay more rent, he said. “It’s a double-edged sword,” Salzman said. “There is an opportunity there, but lenders don’t like the uncertainty from a big rollover risk.” Part of his job in those cases is to provide information on the impact of tenants leaving. “We will really dig in and explain the market to lenders so they understand who the likely replacement tenants will be and what the potential new lease rates will be,” Salzman said. Other News Dale Stewart and Mark Lindgren, a vice president and investment analyst, respectively, of the Denver office of NorthMarq Capital, arranged $3.3 million in permanent financing for the Saddle Rock Self-Storage at 6950 S. Gartrell Road in Aurora. Constructed in 2012, the facility has 400 self-storage units contained in 10 buildings. Stewart and Lindgren arranged the financing for the borrower through NorthMarq’s correspondent relationship with a life insurance company.