In today’s credit environment, most borrowers are taking advantage of attractive interest rates… which remain very close to the all-time lows of the recent recession. Many of these property owners are going one step further by pushing loan dollars up the leverage curve and “cashing out” equity via a refinance. Returning a portion or all of the equity a Sponsor has invested into a project immediately juices the Internal Rate of Return (IRR) and Cash-On-Cash Yields to the Investors.
As good as it sounds to property owners and investors, lenders typically have push back on “Cash-Outs.” The resistance is generated from the fact that the Sponsor will have less “skin in the game” (or none at all!). Lenders like to see true cash equity in a deal, mostly because if something goes sideways, the Sponsor will most likely step up (financially) to save their investment.
Typically, a refinance that results in equity being returned to the sponsor is allowed on a stabilized (cash flowing) asset most likely with a permanent lender. However, there are many items to consider before a lender will commit to a cash-out refi., including:
– Type of Lender: Bank, Bridge, Permanent, Life Co? Typically, shorter term lenders don’t do cash-outs.
– Current Cost Basis: Unless a good story is told, lenders don’t like to provide a loan above the cost basis.
– Value Added By Sponsor: Depending on the what the sponsor accomplished to add value, this could be “spin” on the good story mentioned above.
– Time Frame Owned: If an owner has held a property for a long time, lenders are more inclined to cash-outs due to amortization of the existing debt and appreciation due to income growth.
– Lender Metrics: All of the above is subject to the new loan even making sense. The Debt Service Coverage (DSC), Loan-to-Value (LTV) and Debt Yield all have to be strong.
– Recourse: Especially on a non-recourse deal, a lender will have to measure up all the considerations to make sure a “cash-out” is a safe bet.
– Use of Excess Proceeds: Are the proceeds going into the investor’s pocket or are they being reinvested into the property (TI/LC, capex, etc.)? Obviously the latter is viewed more favorably.
– Future Cash Flows & Reserves: When structuring a cash-out, a lender may require more reserves and triggers if cash-flow dips.
When evaluating the business plan of a property and the investment profile/risk of your investors, you must also proforma future capital structures and financing availability to determine your bottom line returns. If your deal is lacking any of the above items, you may not be able to take advantage of an aggressive financing structure.
In order to take advantage of debt to return capital to your ownership group, you must present the transaction in a light that makes the lender’s investment (loan) appear to be a safe bet that they will get repaid. If a lender has any doubt they will not get repaid because the deal is over leveraged, they will not likely approve a “cash out” refinance… if they will approve a refinance at all.
To see if your property might qualify for return of some equity via a refinance, contact any of our Senior Directors at Metropolitan Capital Advisors. MCA is constantly presenting deals to the capital markets and understand exactly what lenders are looking for with respect to our ability to deliver a “Cash Out” for any given transaction.