Build a give-and-take relationship with your banker. 

Commercial mortgage delinquencies, including those for rental housing properties, increased during the fourth quarter of 2023, according to the Mortgage Bankers Association. Research from Yardi Matrix shows that more than 58,000 rental properties will see their loans, which collectively represent $525 billion, mature within the next five years. 

Meanwhile, Fitch Ratings sees significant risks for banks that have lent to apartment companies and other rental properties, an aggregate figure that rose 32% from 2020 to 2023. And Reuters notes that building owners and operators face rising interest rates, higher insurance premiums, and in many cases, decreasing values. 

Facing this confluence of headwinds, what’s a rental housing company to do? 

Extend, Refinance or Renegotiate? 

Stephanie Graves, owner of Q10 Property Advisors LLC in Houston, works with a cadre of owner-operators with portfolios ranging from a handful to 500-some units, and “any asset without a fixed-rate loan is struggling in different capacities,” she says. “We are finding with the smaller asset sizes, it seems to be a little bit easier. You have more of a one-on-one contact with the lender, and the lenders tend to be smaller, regional banks that you can communicate with more easily. We’re talking to them directly.” 

But those banks sometimes are not that willing to talk until a mortgage holder starts missing payments, Graves says. “I’ve talked to loan restructuring agents who have said, ‘Don’t pay your loan payment for several months, so you get their attention.’ It’s unfortunate,” she says. “I don’t necessarily know that that’s the best route to go, but utilize that for what you will. 

“Some lenders will move to foreclose because they have a structure in place for taking over the assets,” Graves says. “Others are more willing to renegotiate—but the challenge is, that requires a reappraisal, and sometimes that doesn’t meet the valuation of the loan. If it does, lenders sometimes will allow the mortgage holder to defer payments for several months and add them to the back end of the mortgage. But no borrower can sustain that forever.” 

Another idea is to investigate refinancing options through the U.S. Department of Housing and Urban Development (HUD), Graves says, although that “takes a long time, and requires money upfront, and also may require a substantial retrofitting to qualify.” And then property owners can hire a loan renegotiation consultant to advise them on what to do, what to present and what to offer. So, the question becomes, “Do you spend money on a consultant, on application fees for HUD or on kicking [the loan lifetime] down the road?” she says. “All of which, in most cases, requires a cash call to investors, unless you have money on the side for tough times.” 

All of this comes at a time when many property owners are experiencing greater delinquencies in rent collections—and when payments do arrive, they’re often on the 16th or 20th of the month rather than the fifth or tenth, Graves says. “We’re seeing a lot of investors who entered the market as owners when everyone was making money,” she says. “They’ve only seen the good times. It’s more traumatic for them. The institutional owners are more realistic and understand that this is the cycle.” 

Investors tend to be cautious about opening up to their lenders on what they’re facing, thinking the lender will see weak performance and force a default of the loan terms, putting more pressure on the asset, Graves says. She has seen that those who are more transparent are typically better able to work with their banks. “We have seen some success in renegotiating terms to fixed rates,” she says. “The owners who have been playing the ‘what happens if I run out of money’ game are risking much more, and that kind of dance has not been productive.” 

Open Lines of Communication 

Mike Aiken, Senior Vice President of Investment at Fogelman Properties in Memphis, Tenn., says that while there are no silver bullets, solutions can be found—especially if borrowers are proactive. “The best way [banks] can support the borrowers is having open lines of communication,” he says. “That’s incumbent upon the borrower, more so than the bank. Reaching out and creating a plan before it gets tenuous, is the key.” 

A segment of borrowers has not had those conversations yet, and Aiken believes those in the deepest trouble generally tend to be on the lower-priced end of the housing spectrum. “Those are the borrowers who are not having those conversations early enough in the process,” he says. “I highly encourage anyone who can look into their forecasting for the year, if it looks like you’re getting into a break-even or negative cash-flow situation, have those conversations now—don’t wait.” 

Some borrowers are facing the challenge that their loan term is expiring at an inopportune time to be a seller, Aiken says. “If there needs to be some sort of extension of the term, the best thing a lender can do is be creative and thoughtful about it, even if it’s something such as prepaying interest to extend maturity for some period of time. That kind of solution should hopefully be a win-win for everybody.” He adds, “It won’t be free. And that’s fine. These are for-profit businesses.” 

Properties with floating-rate loans originated in the early 2020s when interest rates were low are probably running into the most distress at the moment, Aiken says. “Having some flexibility on the type of hedging instrument that has to be pur-
chased—that is an area where we’ve heard others have successfully negotiated modifications,” he says.“When an interest-rate cap is about to expire, then lenders can offer flexibility—albeit borrowers should not expect the overall requirement to be waived altogether. It would not alter the risk profile and create a viable solution.” 

For example, instead of requiring a three-year cap to be purchased, the lender could agree to a series of three one-year caps—significantly cheaper because the derivatives market prices the out years more expensively, Aiken notes. “That, in my mind, is a reasonable solution,” he says. “It doesn’t change the risk position fundamentally for the lender. Hopefully there’s some ability to work with the borrower, especially if it’s a group they want to do additional business with—and has been a good steward of the asset.… For the most part, it benefits everybody to not have a take-back situation.” 

Relationships vs. Regulators 

It can be challenging for banks to be supportive of relationship clients, particularly in times of higher interest rates, supply issues or other challenging economic factors, says former banker Nahshon Roth, Chief Financial Officer for Bristol Development Group in Franklin, Tenn. 

“Although they desire to work constructively with relationship borrowers, it can boil down to regulators, and how tight they are going to be on lenders and, therefore, borrowers,” he says. “If we went to a bank and asked for more time—we’ll give here, you give there—you try to make it through this window to a place in time where debt is easier to come by, and we can execute on a sale.” 

Borrowers facing a crunch should approach their lender from the standpoint of reviewing and recognizing what they have accomplished in the marketplace, says Bryan Jacobs, CEO of Bristol, also a former banker. 

“You’re asking a bank to recognize a couple of things,” he says. “In the context of what you see in the market, we’re leasing up well. That is something that can be seen and is concrete. Similarly, for multifamily, we have something that not a lot of other real estate categories have—that is Fannie and Freddie. You’ve got debt availability from them, specifically for our property type.… If we know their debt is available at an attractive fixed rate below DSC [debt service coverage] threshold rates in our loan documents, that would be something we would ask a bank to consider.” 

Providing the opportunity for a property to stabilize and lease back up by moving out performance criteria by two or three months can make a major difference, Jacobs says. “If there’s a reason to believe it’s performing well, and maybe in a mode of being able to achieve that objective, things like that would allow for a lender or borrower to find common ground,” he says. “To be able to see a loan as being better quality than if you just had to stick by a certain loan-document-mandated time frame established years earlier and not giving consideration to the market.” 

Jacobs recently engaged with a lender on a new construction project that was roughly 60% leased—for which the floating interest rate had risen about 500 basis points since the deal was inked three years earlier. “Back when we did that loan, nobody, including the bank, would have assumed it would be that high,” he says. A looming performance requirement meant that Bristol would need to be at a certain debt service coverage or debt yield by a certain date, but the lender was willing to push out that date if the company kept pace with the lease up. “It really is predicated upon hitting a break-even debt-service coverage at an inordinately high interest rate, at a certain point,” he says. 

“It’s that balance, that partnership, walking through and being able to give them what they need but also give us more time, so we don’t have to do something drastic, like refinance it at an inopportune time,” Roth says. “Banks often state, ‘We are relationship lenders,’ especially during the good times when they are trying to get these loans. It’s important to remind them of our history, our capacity, our performance and our willingness to work with them when things go awry.” 

The flip side of that comment, Jacobs says, is that borrowers do themselves a favor by engaging with lenders rather than running away. “Eventually, a lender will make contact, and you will have to deal with it,” he says. “If you understand where the market is, that will be helpful to you, especially if you are engaging with multiple different lenders. They all might be in different stages of their own wrestling with the current economic environment.… 

“But at a minimum, that would give you an idea of where the market is going so you are prepared when you do talk to a lender, what items to highlight, and what is meaningful to them, so you can come to an understanding of what is mutually beneficial,” he says. “It’s no big secret that no bank wants to take a property back.” 

Ed Finkel is a frequent contributor to units.