How to Realize Cash-Out Opportunities in Today’s Economy

George Smith Partners recently arranged $17 million in non-recourse refinancing with a $10 million cash-out component for a 14-building, 120-unit multifamily asset located in Sacramento, CA. Connect Media sat down with George Smith Partners’ Principal Antonio Hachem to gather his insights regarding capital markets and the availability of cash-out financing in the current environment.

Q: What qualities are necessary in an asset for a borrower to realize cash-out proceeds?
A: Lenders are more likely to be open to cash-out refinancing when the borrower is substantially invested into an asset. A borrower’s original basis in the property no longer matters. For example, in our recent Sacramento financing, the borrower had invested in extensive capital improvements and value-add renovations to keep the property competitive alongside market rate multifamily assets in the region.

The lender sees this as substantial “skin in the game,” and is more apt to reward that investment with cash-out financing.

Another loan aspect that can affect a lender’s propensity to offer a cash-out component is the requested loan to value.

Even with the $10 million cash-out in the aforementioned transaction, the refinancing was at a low 65% loan to value. Borrowers who are invested in their properties and are seeking a relatively reasonable loan to value are likely to be well-positioned for a cash-out option.

Q: Do you predict that lenders will continue to offer non-recourse option financing as we head into 2019?
A: Absolutely – lenders’ appetite for commercial real estate has been steady this year, especially in multifamily. We expect similar demand as we enter 2019. As capital continues to chase investments and borrowers’ options for financing widen, lenders are increasingly offering non-recourse debt in order to win business.

This is especially true among permanent lenders. Non-recourse permanent financing is mostly obtainable through agencies, Life Cos or CMBS execution. Traditionally, banks only offered recourse debt, however in the current capital markets, we are seeing more and more banks offering non-recourse loans.

This trend will continue over the next few years. If the market shifts, we will see levels and pricing adjust, likely into the 55 – 60% range.

Non-recourse is one of the most appealing features in a loan, as it does not burden borrowers’ balance sheets with contingent liabilities.

Q: What strategies should borrowers be aware of when looking for a non-recourse cash-out loan?
A: When solidifying the terms of any loan, borrowers need to ensure that they remain in control of the property’s fate by negotiating post-closing covenants and non-monetary default clauses, especially in the current rising interest environment and changing economy.

As long as the borrower is servicing the debt, their loan should not be called/accelerated because of a non-monetary default such as occupancy, net worth or liquidity covenants.

As borrowers navigate the current financing climate, it is especially helpful to collaborate closely with someone who is working in the capital markets on a daily basis. This strategy tends to open up new lending solutions that may not have been readily available to the borrower on their own.

For comments, questions or concerns, please contact Dennis Kaiser