At Boulder Equity Partners, we see that commercial property owners have fallen between the cracks when it comes to COVID-19 recovery options. The pandemic has been particularly hard on multifamily, light industrial, office, and retail landlords and property owners.
An average of 15% of residential tenants have defaulted on rent or paid only partial payments each month since April 2020. This trend continues into February 2021. Despite nonpayment of rent, those landlords are hamstrung by eviction prohibitions. While unemployment benefits and business loans are available to a few tenants, little corresponding aid is coming directly to commercial property owners.
Widespread unemployment and underemployment have generated a tenant’s market in the residential sector. Recent surveys indicate as many as 30% of multifamily owners currently offer rent concessions or leasing incentives. (Tenants say that number is closer to 50%.) Common rent concessions range from two weeks to two months of free rent.
Those incentives began to appear in July 2020. The strategy has been successful in stabilizing vacancy rates. However, no one expected competition for concessions to continue for this long. Because the end of the pandemic is predicated on the vaccine rollout, experts now predict today’s economic trends will last well into the summer of 2021.
At the same time, the pandemic has increased the costs of doing business for some. From providing hand-sanitizing stations and PPE for staff, increased staff training, converting in-person systems to digital formats, and continued common area expenses without offset, owners are draining cash reserves.
All of this is hurting cash flow and some commercial clients who own or lease properties in the retail, office, and light industrial asset classes are feeling the squeeze. They are at risk of defaulting or making late payments on their long-term mortgages. These clients are putting out feelers for cash-outs or trying to refinance their loans to give the slightest edge in monthly payments. But banks are tightening their restrictions on long-term lending and any financial hardship is cause for decline.
Clients who turn to high-interest lines of credit soon may reach the limit on those high-interest lines or struggle to make the payments before the economy recovers.
Boulder Equity Partners has an option for these types of borrowers. If they have available equity in their properties, it is often a lifesaver to convert that equity to cash with a bridge loan. That way, they can make it through the remainder of tough times, and then refinance back into a long-term low-interest loan once things return to normal.
A bridge loan can be used to pay off the long-term loan before chronic late payment or a default leads to a forced sale. If current cash flow needed to service the loan is insufficient, the borrower may be able to add an interest reserve. Those funds can be set aside and applied as needed to make monthly payments during the leanest cash flow periods.
Where the borrower’s current income will not qualify for a long-term refinance or cash-out, Boulder Equity Partners can use pre-pandemic income as a basis for where we expect future income to recover, once the pandemic-generated financial stress has passed. An interest reserve can then bridge the gap between current (lower) income and future stabilized income.
Over the term of the bridge loan, typically 12-24 months, the borrower can continue to meet their obligations as the economy recovers. After twelve months, the borrower can apply to Boulder Equity Partners for a long-term commercial real estate loan to take out the bridge loan.
Tenants often complain about living paycheck to paycheck or month to month. Many landlords now are experiencing that same stress. A bridge loan and interest reserve can serve as a viable business strategy to avoid default or foreclosure while providing the peace of mind of knowing that the payments are covered.
Boulder Equity Partner’s minimum loan requirement for bridge loans is $1MM. For more details, see Loan Programs.
As a nationwide lender for all commercial real estate loans, Boulder Equity Partners offers a wide range of loan programs, from low-interest long-term products to quick-close options, bridge loan programs that can be migrated to long-term, and hard money loans.
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