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New York Times – 2003 - Just as homeowners are being blitzed by e-mail offers to refinance their homes at “50 year” and “all time” low rates, commercial real state property owners are also being pitched offers that once would have seemed too good to be true – and seizing on them.

“We closed on two refinancings this week,” said Alexander von Summer III, managing principal of the Paramus real estate firm Alexander Summer, which owns commercial property all over New Jersey. “We have another one just about to close. There are another two properties where we are looking at refinancing.”

“The interest rates truly are at a historic low, and this is the time to harvest opportunities,” he said. ”Everybody in real estate that I talk to, if there is any opportunity to secure a mortgage, they’re pursuing it.”

The Gale Company, based in Florham Park, closed last month on a huge refinancing, gaining it a reduction of two percentage points on the rate of interest on a mortgage covering 37 properties, mainly in New Jersey. The $418 million mortgage is for the Bellemead portfolio, purchased in1997 from Chubb Insurance in partnership with UBS Paine Webber and Morgan Stanley.

Negotiating over 18 months with the original lender on the purchase, the General Electric Capital Corporation, “we entirely recast the loan,” said Gale’s president, Mark Yaeger. The mortgage was extended for three years, at a floating rate tied to various economic indices, he said; he did not disclose the current rate.

Mr. Yaeger said Gale was considering an additional step to keep the interest rate down – one that is not generally available to a homeowner with a floating rate mortgage. “We are contemplating acquiring a couple of interest rate caps,” he said. “Those are insurance policies that protect from an unforeseen spike interest rates.”

Jon Mikula, a senior director with the commercial real estate finance company Holliday Fenoglio Fowler, an Edison-based firm that acts as an intermediary for commercial property owners in arranging financing, noted that rates have crept up a bit over the past couple of months. But, he added, “They are still ridiculously low.”

Fixed-rate financing that locks in a low interest rate for an extended time continues to be the best option. So, why are many companies pursuing floating-rate loans? “Generally, because they have to,” Mr. Mikula said. “They have a mortgage coming due, and they know interest rates are not expected to rise rapidly for at least a year, so they go with the lowest rate available now, realizing they may have to refinance again when rates go up significantly.”

Mr. Mikula said he had refinanced his home three times in the last 20 months, starting with adjustable-rate loans, because “I don’t expect to be there all that long, and the rates were better,” and most recently obtaining a 4 percent fixed-rate, seven-year loan because “that’s an amazingly good deal.”

Mr. Mikula said there is a “bubble” of three-to-five year floating-rate loans coming due now, loans that were taken on properties that had substantial vacancy rates at the time of purchase by buyers who believed they could turn that around. But many commercial property owners found that impossible amid exceedingly sluggish market conditions in the past 18 months. Nationwide, Mr. Mikula said, approximately $12 billion in floating rate loans on commercial property is coming due in 2003.

“Some companies in New Jersey bought buildings that were 50 percent leased with a game plan of trying to stabilize the property in three years – and now it’s three years later, and unlike Gale’s scenario, there has been no leasing,” he said. “The property is still 50 percent vacant.”

Mr. Mikula said those property owners would face “a challenging time” attempting to refinance their properties.

On the other hand, he said, companies that have made successful turnarounds of commercial properties are welcomed at mortgage bank “swap desks,” where floating-rate mortgages can be converted to fixed-rate, and vice versa. Denholtz Associates of Rahway, a firm that focuses on purchasing properties it can improve and lease up, for example, was able to refinance five properties valued at $90.5 million in the last year.

In Newark, the Heritage Management Company announced it had recently refinanced the mortgage on an office building at 550 Broad Street – purchased only 18 months earlier – after renovating the building and increasing its occupancy from 50 percent to 90 percent.

Heritage Management bought the 282,000-square-foot building for $20.5 million in June 2001, putting up $2 million in equity and taking a three-year acquisition loan at 6.86 percent interest for $18.5 million, said Heritage’s president, Steven M. Greenberg. When an offer to purchase the refurbished leased-up building came in at $38 million last fall, Mr. Greenberg said, Heritage decided to hold onto 550 Broad instead of selling- and to borrow at a better rate against the property’s increased value.

Heritage refinanced the mortgage for $27 million at a rate of 6.6 percent with the Bank of New York, Mr. Greenberg said, and took $2 million in cash away from the deal. “The refinancing allowed our company and investors to realize the full benefits of an effective turnaround at the property,” he said.

Mr. Mikula said he continuously gets calls from property owners with older fixed-rate mortgages who would like to refinance, but who worry that prepayment penalties – known as yield maintenance penalties by lenders – make it a bad idea. “But if you do the math, and roll over the penalty and the balance, cash flow increases significantly,” he said. “Refinance really becomes a no-brainer.” He offered the following hypothetical case to illustrate.

“Let’s say you have a property which had a $10 million debt on it, purchased eight years ago. For a 10-year loan with 25-year-amortization, a good rate at that time was 8.5 percent, which would give you annual debt service of $965,000 and a loan balance of $8.7 million.

“In order to refinance, you will have to pay the yield maintenance penalty to the original lender to provide him with the return he would have gotten if you stayed with him. You calculate this by looking at alternative investments he might make with the money – Treasury notes, more often than not. The difference between the mortgage interest on $8.7 million, and $8.7 million invested in treasuries paying 1.8 percent is $1.1 million,” over the two years left on the original loan.

“You might say: $1.1 million! That’s 12.8 percent as a prepayment penalty!’

“But if you take the $8.7 principal balance, plus the $1.1 million penalty, for a total balance of $9.8 million, and you get a new 10-year loan, with 30-year amortization, and a 6 percent interest rate, your new annual payment is – holy cow! – only $705,000.” With an annual saving of $260,000, the prepayment penalty would be covered in less than five years.

Alternatively, Mr. Mikula added, if his hypothetical owner wanted to keep his annual debt service at $965,000, he would be eligible for a mortgage loan of $13.4 million at 6 percent – and could legally take the $3.6 million extra that was borrowed tax free. The $1.1 million prepayment penalty might be tax deductible as well, he said, if claimed as interest payment.

But maybe, Mr. Mikula said, that course of action does not work for a particular property owner. Perhaps, refinancing a year or two from now makes more sense. In that case, the lending specialist said, it is possible to “block in a forward permanent loan.” In other words, a commercial owner can obtain a commitment from a lender for a loan at today’s rates that will be activated a year or two down the line.

“Most lenders are comfortable with blocking in 12 to 18 months,” he said, “and in some cases, 24 months.”

Also, stepped-down prepayment penalties are available, Mr. Mikula said, so that if a borrower refinances within the first year of a loan he pays a certain percentage as penalty, a lower percentage the second year and so on. “This is so darn smart for property owners,” he said. “Once the payment drops, then you close on the new loan.”

Mr. Mikula says he tells clients to pore over their portfolios, analyzing every prepayment opportunity and seeking any possibility of obtaining a locked-in low rate of interest on a new loan.

Mr. von Summer quoted his advisers as saying, “Take on all the debt you can right now.” Alexander Summer is currently buying out a long-term ownership partner for a warehouse in Carteret. The partner, an individual investor who is engaged in estate planning sought the buyout, according to Mr. von Summer. The company is happy to proceed, he said, since it was able to secure a nine-year loan at just a fraction over 5 percent. “With interest rates like these, he said, “it’s definitely win-win.”


Refinancing Fever also strikes Commercial Owners By Antoinette Martin New York Times – 2003 - Just as homeowners are being blitzed by e-mail offers to refinance their homes at “50 year” and “all time” low rates, commercial real state property owners are also being pitched offers that once would have seemed too good to be true – and seizing on them. “We closed on two refinancings this week,” said Alexander von Summer III, managing principal of the Paramus real estate firm Alexander Summer, which owns commercial property all over New Jersey. “We have another one just about to close. There are another two properties where we are looking at refinancing.” “The interest rates truly are at a historic low, and this is the time to harvest opportunities,” he said. ”Everybody in real estate that I talk to, if there is any opportunity to secure a mortgage, they’re pursuing it.” The Gale Company, based in Florham Park, closed last month on a huge refinancing, gaining it a reduction of two percentage points on the rate of interest on a mortgage covering 37 properties, mainly in New Jersey. The $418 million mortgage is for the Bellemead portfolio, purchased in1997 from Chubb Insurance in partnership with UBS Paine Webber and Morgan Stanley. Negotiating over 18 months with the original lender on the purchase, the General Electric Capital Corporation, “we entirely recast the loan,” said Gale’s president, Mark Yaeger. The mortgage was extended for three years, at a floating rate tied to various economic indices, he said; he did not disclose the current rate. Mr. Yaeger said Gale was considering an additional step to keep the interest rate down – one that is not generally available to a homeowner with a floating rate mortgage. “We are contemplating acquiring a couple of interest rate caps,” he said. “Those are insurance policies that protect from an unforeseen spike interest rates.” Jon Mikula, a senior director with the commercial real estate finance company Holliday Fenoglio Fowler, an Edison-based firm that acts as an intermediary for commercial property owners in arranging financing, noted that rates have crept up a bit over the past couple of months. But, he added, “They are still ridiculously low.” Fixed-rate financing that locks in a low interest rate for an extended time continues to be the best option. So, why are many companies pursuing floating-rate loans? “Generally, because they have to,” Mr. Mikula said. “They have a mortgage coming due, and they know interest rates are not expected to rise rapidly for at least a year, so they go with the lowest rate available now, realizing they may have to refinance again when rates go up significantly.” Mr. Mikula said he had refinanced his home three times in the last 20 months, starting with adjustable-rate loans, because “I don’t expect to be there all that long, and the rates were better,” and most recently obtaining a 4 percent fixed-rate, seven-year loan because “that’s an amazingly good deal.” Mr. Mikula said there is a “bubble” of three-to-five year floating-rate loans coming due now, loans that were taken on properties that had substantial vacancy rates at the time of purchase by buyers who believed they could turn that around. But many commercial property owners found that impossible amid exceedingly sluggish market conditions in the past 18 months. Nationwide, Mr. Mikula said, approximately $12 billion in floating rate loans on commercial property is coming due in 2003. “Some companies in New Jersey bought buildings that were 50 percent leased with a game plan of trying to stabilize the property in three years – and now it’s three years later, and unlike Gale’s scenario, there has been no leasing,” he said. “The property is still 50 percent vacant.” Mr. Mikula said those property owners would face “a challenging time” attempting to refinance their properties. On the other hand, he said, companies that have made successful turnarounds of commercial properties are welcomed at mortgage bank “swap desks,” where floating-rate mortgages can be converted to fixed-rate, and vice versa. Denholtz Associates of Rahway, a firm that focuses on purchasing properties it can improve and lease up, for example, was able to refinance five properties valued at $90.5 million in the last year. In Newark, the Heritage Management Company announced it had recently refinanced the mortgage on an office building at 550 Broad Street – purchased only 18 months earlier – after renovating the building and increasing its occupancy from 50 percent to 90 percent. Heritage Management bought the 282,000-square-foot building for $20.5 million in June 2001, putting up $2 million in equity and taking a three-year acquisition loan at 6.86 percent interest for $18.5 million, said Heritage’s president, Steven M. Greenberg. When an offer to purchase the refurbished leased-up building came in at $38 million last fall, Mr. Greenberg said, Heritage decided to hold onto 550 Broad instead of selling- and to borrow at a better rate against the property’s increased value. Heritage refinanced the mortgage for $27 million at a rate of 6.6 percent with the Bank of New York, Mr. Greenberg said, and took $2 million in cash away from the deal. “The refinancing allowed our company and investors to realize the full benefits of an effective turnaround at the property,” he said. Mr. Mikula said he continuously gets calls from property owners with older fixed-rate mortgages who would like to refinance, but who worry that prepayment penalties – known as yield maintenance penalties by lenders – make it a bad idea. “But if you do the math, and roll over the penalty and the balance, cash flow increases significantly,” he said. “Refinance really becomes a no-brainer.” He offered the following hypothetical case to illustrate. “Let’s say you have a property which had a $10 million debt on it, purchased eight years ago. For a 10-year loan with 25-year-amortization, a good rate at that time was 8.5 percent, which would give you annual debt service of $965,000 and a loan balance of $8.7 million. “In order to refinance, you will have to pay the yield maintenance penalty to the original lender to provide him with the return he would have gotten if you stayed with him. You calculate this by looking at alternative investments he might make with the money – Treasury notes, more often than not. The difference between the mortgage interest on $8.7 million, and $8.7 million invested in treasuries paying 1.8 percent is $1.1 million,” over the two years left on the original loan. “You might say: $1.1 million! That’s 12.8 percent as a prepayment penalty!’ “But if you take the $8.7 principal balance, plus the $1.1 million penalty, for a total balance of $9.8 million, and you get a new 10-year loan, with 30-year amortization, and a 6 percent interest rate, your new annual payment is – holy cow! – only $705,000.” With an annual saving of $260,000, the prepayment penalty would be covered in less than five years. Alternatively, Mr. Mikula added, if his hypothetical owner wanted to keep his annual debt service at $965,000, he would be eligible for a mortgage loan of $13.4 million at 6 percent – and could legally take the $3.6 million extra that was borrowed tax free. The $1.1 million prepayment penalty might be tax deductible as well, he said, if claimed as interest payment. But maybe, Mr. Mikula said, that course of action does not work for a particular property owner. Perhaps, refinancing a year or two from now makes more sense. In that case, the lending specialist said, it is possible to “block in a forward permanent loan.” In other words, a commercial owner can obtain a commitment from a lender for a loan at today’s rates that will be activated a year or two down the line. “Most lenders are comfortable with blocking in 12 to 18 months,” he said, “and in some cases, 24 months.” Also, stepped-down prepayment penalties are available, Mr. Mikula said, so that if a borrower refinances within the first year of a loan he pays a certain percentage as penalty, a lower percentage the second year and so on. “This is so darn smart for property owners,” he said. “Once the payment drops, then you close on the new loan.” Mr. Mikula says he tells clients to pore over their portfolios, analyzing every prepayment opportunity and seeking any possibility of obtaining a locked-in low rate of interest on a new loan. Mr. von Summer quoted his advisers as saying, “Take on all the debt you can right now.” Alexander Summer is currently buying out a long-term ownership partner for a warehouse in Carteret. The partner, an individual investor who is engaged in estate planning sought the buyout, according to Mr. von Summer. The company is happy to proceed, he said, since it was able to secure a nine-year loan at just a fraction over 5 percent. “With interest rates like these, he said, “it’s definitely win-win.” Back to top of page Return to Menu
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