It’s no secret that the commercial real estate loan market has been under duress; skyrocketing interest rates are impacting the ability for borrowers to refinance, thus putting lenders in an uncomfortable situation.
Imagine a scenario where a borrower is unable (or unwilling) to refinance. They secured their original financing in a low-interest rate environment, the end of their term is coming due, and refinancing would require a significantly higher monthly interest rate. If the borrower chooses not to refinance, their only option is to return the property to the lender. The problem is, this likely means the lender will sell the property for a loss, taking a hit to their balance sheet in the process.
The solution for this scenario is a loan extension, also known as a loan modification or loan workout. A loan extension allows borrowers to adjust the terms of an existing commercial real estate loan, specifically by extending the loan’s maturity date, adjusting interest rates, or modifying payment schedules.
In our current market environment, we’re seeing lenders working with borrowers to avoid holding bad debt. A short-term extension is exactly what it sounds like: borrowers extend their loan and save money with the old interest rate, avoiding the consequences of loan default, and lenders maintain a performing loan rather than foreclosing on the property.
According to Trepp, to date in 2023 more than $5.65 billion in loans have been modified with an extension. 37% were for a 1–12 month extensions, 32% were for a 13-24 month extension, 9% had their loans extended 25-36 months, and the remaining 22% extended their loans at least 37 months.
Commercial real estate loan extensions can be a lifeline for property owners, investors, and developers facing financial challenges or changing market conditions. By working closely with their lenders and providing a compelling case for a loan extension, borrowers can often find solutions that allow them to preserve their investments and protect their properties from default. Loan extensions, when executed thoughtfully, can help stakeholders weather the storms of an ever-evolving real estate market.
Justin Langlois, CCIM is a Commercial Real Estate Advisor with Stirling Investment Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.