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Distress in the Wall: Troubled Assets and What to Do With Them (Part 2)

Who has the appetite to take on these troubled refi's and how can they manage risks during re-positioning?

The year 2017 may be the year of "Cash-In Refinancing", with many properties not generating sufficient cash flow to attract new senior loans sufficient to pay off maturing loans. The "cash in" is the combination of fresh borrower equity (either with their own funds or a new partner's) or with a new senior debt in combination with "gap" financing either through mezzanine, bridge, hard money, or preferred equity capital. Often the gap financing is covering a construction element to re-position the asset. 

As I mentioned in my last blog, the concern about what is left in the wall of maturities is centered on a few asset types, and we are frequently being asked to do work on these sites in support of re-positioning. Some examples:

  • Retail - there is the typical re-tenanting but in a lot of cases, significant alterations are being made to demise space to sizes that are more in line with market demand.
  • Malls - we are seeing re-purposing of these assets which may include complete tear down and rebuilding or partial reconstruction in order to bring in other uses, for example turning a vacant anchor store into apartments.
  • Office, particularly suburban - a lot of these loans in distress are in need of major renovation, not just cosmetic improvements but considerable upgrades to building systems that are past their useful life or are energy/water-inefficient. Again, a lot of times space has to be demised/re-purposed, particularly in cases where buildings lose large tenants and that market no longer supports large tenant users.

So on top of the challenge in weighing market risks and making an asset more desirable, there are some physical risks to consider that come along with rehab projects.

Continue reading the GlobeSt blog here.