Rising interest rates and inflation continue to dominate the news. Banking industry concerns and credit tightening have become important consequences. Please enjoy our quarterly newsletter discussing these themes, their impact on commercial real estate, and more.
COMMERCIAL REAL ESTATE NEWS
The Continuing Extraordinary Impact of Higher Interest Rates on Commercial Real Estate Investing
The 2022 rise in interest rates greatly impacted all industries across the economy. But the abrupt change since last June hit the highly leveraged real estate industry particularly hard. For real estate owner-operators and investors, interest rates are not only the price of debt but also the driver of asset values — a double whammy.EisnerAmper – Full Article Here
A Guide to the Bonus Depreciation Phase Out 2023
Bonus Depreciation is an accounting method that allows businesses to write off a percentage of the cost of certain assets in the year the property is in service. The IRS sets the amount of Bonus Depreciation you can take in any given year, which is subject to change. In addition, the IRS has enacted several retroactive bonus depreciation changes in recent years. As a result, businesses will need to plan for a decrease in their Bonus Depreciation deduction in 2023.Shared Economy Tax – Full Article Here
Builder Confidence Edges Higher in March but Future Outlook Uncertain
Although high construction costs and elevated interest rates continue to hamper housing affordability, builders expressed cautious optimism in March as a lack of existing inventory is shifting demand to the new home market..National Association of Home Builders – Full Article Here
Strategies in a High Rate Environment
The Fed raised interest rates again in late March, the nineth increase since March of 2022, sending the Prime rate to 8.00%. Treasury rates, which often influence longer term commercial borrowings, have also risen considerably over that timeframe. The rate of inflation is declining, but the most recent Consumer Price Index (CPI) still shows annual inflation at 6.00%. What can small business owners and real estate investors do in this unusual rate environment?
Build cash reserves: if you are able, now may be a good time to add to your cash reserves. Several experts are expecting the increase in interest rates to cause a recession. Whether or not a recession happens and how deep a recession will be is still a guess. It never hurts to have cash on hand to help pay expenses and make debt service payments should the economy become more challenging. A recession may also bring real estate values down. Having cash on hand will be a great resource if that happens.
Optimize cash holdings: make sure you take advantage of current rates by investing cash reserves in a way that optimizes earnings and allows your business to continue to operate effectively.
Review variable rate loans: if you have borrowed in the past with a variable rate, your rate and payment have likely increased significantly. If the loan is a line of credit, can the line be paid down or paid off? Can the loan be refinanced into a fixed rate loan? Be careful to check for any prepayment penalties that may increase the cost of refinancing.
Review your pricing strategy: if you own a business, are you charging enough for your product or service? Have your prices kept up with inflation and your competition? As a real estate investor, review your leases. The most recent CPI report showed shelter costs have risen 8.1% on an annual basis. Are your tenants paying market rates? Do the leases allow you to increase rates? Are you charging enough for common area maintenance and reimbursable expenses?
Sharpen your pencil when borrowing: lenders are tightening their underwriting criteria. Make sure to provide your lender with a conservative budget or forecast and be able to support the details. Be prepared to bring more cash to the table, have lower loan to value expectations, support a higher debt service coverage ratio or even plan for higher vacancy rates.
Carefully review new loan offers and documents: as the economy changes, lenders are changing their requirements. A new loan may have different loan covenants than it did 2 years ago. For example, a lender may require deposits to be held at the institution or require a higher debt service coverage than previously required. In addition, you’ll want to minimize prepayment penalties. If rates go down, you’ll want the ability to refinance into a lower rate, lower payment loan without significant costs.
It is important for business owners to have a trusted group of advisors, including CPAs and attorneys, that can assist the business owner in being successful in this unusual and changing economic environment. AAI Financial Group can assist you by reviewing your situation and guiding you through the borrowing process.
It is important for business owners to have a trusted group of advisors, including CPAs and attorneys, that can assist the business owner in being prepared to meet the “C’s of Credit”. AAI Financial Group can also assist you by reviewing your situation and your potential to borrow.
RECENTLY FUNDED TRANSACTIONS
Here are examples of opportunities we assisted our clients with last quarter:
- $8,800,000 Multifamily Construction – Tri Cities, WA – 72.79% LTC
- $2,300,000 Multifamily Refinance – Moses Lake, WA – 64.5% LTV
- $487,500 Office Purchase – Richland, WA – 75% LTV
AAI Financial Group continues to grow! We are looking for Loan Originators to join our team and participate in our continued success. For more information, email us at firstname.lastname@example.org or view our career opportunities here.