Jerry Nelson and Dolores Kelley
Many shopping center owners, developers and others have cut costs, increased income and received other rewards from refinancing. Some borrowers are rushing to refinance now before interest rates jump up more than they already have.
If you are nearing the end of your term loan, have an adjustable rate or have established equity in your property and desire to lower your monthly payments or cash out some of your equity, you should evaluate whether refinancing would benefit your bottom line.
Should You Refinance Now?
In March, we warned on our New Jersey law blog that interest rates could climb and asked readers to consider refinancing to cut costs and increase income before losing the opportunity to lock in a lower rate. In May, we advised on our New Jersey Law Blog that landlords were buying, financing, improving and selling properties to take advantage of low interest rates, available financing and rising values.
As predicted, rates have started to tick upward, resulting in increased borrowing costs, which will continue to climb along with rates. The 10-year Treasury yield jumped to 2.93 percent on Sept. 12, up from 1.71 percent at the same last year. The good news is that you may still have a limited time to benefit from refinancing before your window of opportunity closes.
Although interest rates have climbed, they are still historically low. In addition, rents, occupancy rates, and property values are rising and loans are available for qualified borrowers. Property owners should take note that these opportunities may not last, and if you snooze, you may lose.
Will You Benefit?
In some circumstances borrowers may refinance to lower payments and cut costs, while others refinance to increase income by using loan proceeds to develop, transform, remodel, or improve properties to attract and retain the best tenants and increase rents. There may be additional benefits to refinancing including accessing needed cash, avoiding balloon payments, reducing or extending the term of the loan, reducing the amount of debt, and improving loan terms.
Before you decide to refinance, the costs and benefits should be evaluated (i.e. compare the expected expenses with the expected savings and income). It is essential to carefully consider all of the potential costs associated with a refinance including the appraisal, inspection, legal, title, and other fees, and any penalties for early payment of the existing loan.
It is also important to calculate if and when your expected savings and income will equal or exceed your expected borrowing expenses and determine whether the benefits outweigh the costs. Before refinancing with another lender, it may also be worthwhile to contact your current lender about doing a modification of your existing loan, which could substantially reduce your closing costs.
Prevent Delays by Planning Ahead
Careful planning is required to quickly achieve your goals when refinancing and is essential to expedite the transaction to avoid losing any benefits, such as a lower interest rate that may be locked in. For example, you should make sure your financials are current, corporate documents are in order, taxes are fully paid and the business is in good standing, which are typical requirements for a lender before closing on a loan.
In addition, you should provide all financial and other information requested by your lender so the lender remains focused on your loan application in a timely manner. To avoid delays, you should quickly deal with any compliance, environmental, title, maintenance, repair, insurance, collection, estoppel, lawsuits and other unresolved issues and disputes.
Prevent Future Problems with Careful Review of Documentation
Evaluating the above issues and careful scrutiny of the lender's proposed loan documentation requires detailed review by experienced counsel. Lenders generally begin the negotiating process with very broad language restricting the rights of the borrower.
Depending on the loan amount, financial strength and quality of the borrower, an attorney can negotiate with the lender's counsel on your behalf to modify the loan documents to limit the risks of and restrictions on the borrower and the borrower's affiliates and principals. For example, counsel can negotiate with the lender to reduce any restrictions that impose impractical limitations on your operations and flexibility to change your tenants, reduce rents, terminate and modify leases.
In addition, personal guaranties should be limited to the extent possible. An experienced attorney can help you to minimize risks and ensure that you close on a lower interest rate loan as quickly as possible.
— Jerry Nelson, Esq., and Dolores Kelley, Esq., are attorneys at Stark & Stark. Nelson is a shareholder and can be reached at jnelson@stark-stark.com. Kelley is an associate and can be reached at dkelley@stark-stark.com.