Fed changes in monetary policy due to inflation, supply chain issues and continuing COVID concerns will impact commercial real estate. Please enjoy our quarterly newsletter addressing these issues and more.
COMMERCIAL REAL ESTATE NEWS
What the Interest Rate Hikes Mean for CRE
With the Federal Reserve finally realizing inflation was “running a little too hot,” commercial real estate executives and economists were expecting the Fed to begin raising interest rates in the new year, but some said they were surprised the market could see three rate hikes in 2022.
Commercial Property Executive – Full Article Here
Bouncing Back: 2022 Commercial Real Estate Outlook
Despite suffering setbacks during the pandemic in 2020 and 2021, the commercial real estate industry has a positive outlook heading into 2022. As we navigate the 2022 commercial real estate asset classes, keep an eye on these trends and opportunities.
J.P. Morgan – Full Article Here
5 Common Reasons Small Business Loan Applications are Denied (and How to Avoid Them)
Getting rejected for a small business loan is practically a rite of passage for entrepreneurs. Rejection rates can be as high as 73 percent with traditional banks. The odds improve a bit with alternative lenders, who generally approve around 57 percent of small business loan applications, but the rejection rates can be disheartening.
Business 2 Community – Full Article Here
ECONOMIC DATA
LIBOR rates are no longer being published in AAI Quarterly Newsletter.
In 2017 in the United States, the Alternative Reference Rates Committee (ARRC), convened by the Federal Reserve Board, officially endorsed the Secured Overnight Financing Rate (SOFR) as the preferred benchmark interest reference rate replacing LIBOR. SOFR’s price is based on borrowing rates for overnight U.S. Treasury repurchase agreements, or repos.
On March 5, 2021, the Financial Conduct Authority, the financial services regulator in the UK, announced the cessation of LIBOR.
BORROWER EDUCATION
Debt Covenants
Debt Covenants, also called loan covenants or financial covenants, are a part of the loan agreement that limit the actions of the borrower. The purpose of covenants are to reduce the risk to the lender by restricting borrowers from taking actions that could have an adverse impact on the business or may increase the risk to the lender after the loan is made. The benefit to the borrower is that the lender is willing to provide a lower rate if the borrower is willing to abide by the restrictions.
There are two types of debt covenants: positive debt covenants and negative debt covenants.
Positive debt covenants are covenants that require the borrower to do something. Common positive debt covenants include:
- Provide financial statements and / or tax returns annually
- Pay all property and income taxes on time
- Maintain property and / or liability insurance
- Maintain certain financial ratios such as working capital, debt to equity or debt payment coverage
In the case of debt payment coverage, the agreement will usually define a method to calculate cash flow, such as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The cash flow divided by the payment will be required to be higher than a certain number. For example, the covenant may require EBITDA / Required Debt Payment to be greater than 1.50.
Negative debt covenants are covenants that restrict the borrower from doing something. Common negative covenants include:
- Borrow additional debt
- Make a change in ownership
- Sell key assets, specifically collateral
- Merge with or acquire another company
If covenants are broken, the lender may take one or several actions, such as:
- Increase the interest rate
- Require penalty payments
- Require additional collateral
- Demand immediate repayment of the full balance
Debt covenants are not meant to be a burden to the borrower. Lenders want borrowers to be successful, for loans to be repaid per the original schedule, and to work with their borrowers again.
Debt Covenants – Full Article
What Small Business Loan Holders Need to Know About Debt Covenants – Full Article
RECENTLY FUNDED TRANSACTIONS
Here are examples of opportunities we assisted our clients with last quarter:
- $1,642,000 Dealership Purchase – Yakima WA – 75% LTV
- $4,100,000 Casino Purchase – Lakewood, WA – 50% LTV
- $2,500,000 Rental Property Portfolio, Cash Out Refi – Yakima, WA – 61% LTV
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