$875B of commercial loans come due this year: a 2021 fourplex balloon at 7%

$875B of commercial loans come due this year: a 2021 fourplex balloon at 7%

Real Estate Agent · Louisville, KY · Member since 2017 · 1k+ posts · 1k+ votes

Hi all, Rob here, a Louisville agent who works mostly with investors.

$875 billion. That's how much commercial and multifamily mortgage debt comes due in 2026, according to the Mortgage Bankers Association. It's about 17 percent of all the commercial real estate debt in the country. Last year it was $957 billion, and a lot of that got kicked down the road with extensions, which means a lot of it is still sitting out there.

Here's why it matters locally. Most commercial loans aren't 30-year mortgages. They're 5, 7, or 10 years, then the balance comes due all at once. Anything with two or more units is commercial, so this isn't just office towers downtown. It's the fourplex, the 8-unit, the strip center.

Round numbers. Say you bought a fourplex in 2021 with a $300,000 loan at 3.75 percent on a 25-year schedule with a five-year balloon. Your payment was about $1,542 a month. Five years later you still owe about $260,000. Refinance that same balance at 7 percent and your payment goes to about $1,839. That's roughly $300 more a month, or $3,600 a year, out of the same rents.

For a lot of owners that's fine. Rents went up since 2021 too. For some it's the difference between a building that pays them and a building they pay for. And some owners won't get the full amount back from the bank at all, which means they either bring cash to closing, sell, or find a different kind of financing.

How the new loan gets sized: commercial lenders size a loan two ways, and you get whichever number is lower. One is by the building's income, using DSCR (debt service coverage ratio): the net income divided by the yearly loan payments. The other is by value, using LTV (loan-to-value).

Back to that fourplex. Say it brings in $34,000 a year in net operating income after taxes, insurance, and upkeep, and it's worth $450,000 today. At 7 percent on a 25-year schedule, with a lender who wants a 1.25 DSCR and lends up to 75 percent of value, the income test gets you about $320,700 and the value test gets you $337,500. The income test wins, so the loan is about $320,700. They owe about $260,000. So that owner doesn't just refinance. They can pull out roughly $60,000 before closing costs. Same building, very different conversation than the one they were dreading. (Illustration only. Plug in your own numbers.)

What the supply side looks like in Jefferson County as of early October: 153 multifamily buildings for sale, from duplexes up to a 48-unit. The MLS month-end count went from 94 in March to 174 in September, nearly double. 38% of them have already cut their price, and the average cut is 10.6%.

So what do you do with that?

If you own: find your note. Look at the maturity date. If it's inside the next 18 months, you have more options now than you will 60 days before it's due. Refinance, sell, sell to a buyer who assumes or carries paper, or hold and pay down. Every one of those is easier with time on your side.

If you're buying: this is where motivated sellers come from. Not distress for the sake of it. Just owners who have a date on the calendar and would rather make a clean decision than a rushed one. My play is two offers on every building. One is cash or hard money, a fast clean close at a lower number. The other is seller financing, closer to their price, where the seller carries the loan and you pay them every month instead of a bank. A no costs you nothing, and every no is an owner who knows your name when that balloon comes due.

Not tax, legal or lending advice. Run it past your own CPA and attorney.

If you've got a balloon coming due in the next 18 months, what's the plan: refinance, sell, or carry? And for the lenders and brokers here, where are you quoting DSCR on small multifamily right now?

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  • Matthew MorrowBusiness Member
    Investor · PA - NY - NJ · Member since 2019 · 514 posts · 182 votes
    2d

    @Rob Bergeron That maturity wall is showing up on a lot of small multifamily too, and a 2021 rate jumping to around 7% is rough on cash flow. What we're seeing is owners stress-testing DSCR at today's rates before deciding hold vs. sell, not just looking at LTV. If the debt service eats the deal, the options narrow fast. On that fourplex, are you leaning refi and hold, or exit?

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    • Jay HinrichsBusiness Member
      Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
      1d

      I suspect a majority of the 5 year call loans we see today will not make DSCR as rents have not gone up substantially in many markets and in some rents have gone down.. so sell refi or get your bank to extend but your going to need a cash infusion to get back in your DSCR covenant. I have one that is currently 4% and is going to jump to 7% or more it was a 10 year loan with the 5 year reset.. I am just going to pay it off. Class B prop with Class A physician tenant. These are personal decisions of course an it goes against the refi or max leverage theory. But a basically guaranteed 7% return on a building like this to me is a great investment.

  • Mark UpdegraffBusiness Member
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 703 votes
    1d

    @Rob Bergeron This is an important consideration for multifamily owners right now, particularly anyone approaching a balloon payment or rate reset.

    One distinction I'd make is that two- to four-unit properties can still qualify for conventional residential financing. The actual loan structure matters more than simply counting the units.

    From an investment standpoint, I'd want to evaluate the current NOI, rent roll, insurance, taxes, capital expenditures and available refinancing terms well before maturity.

    A property can maintain its market value while supporting substantially less debt because of the new interest rate and required DSCR.

    That's where owners can find themselves needing to contribute additional equity even though the underlying property is performing reasonably well.

    Are you seeing lenders becoming more restrictive because of DSCR or because of declining valuations?

  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 671 votes
    1d

    Good breakdown. What I keep seeing with small multifamily owners is they don't know their balloon date until the bank calls. It's buried in the note, and the monthly payment looks like any other mortgage.

    I'd pull it out and keep it somewhere you look every month, along with the actual loan balance, not just the payment. About 12 to 18 months out, run the property's last 12 months of real income and expenses against today's rate and see what DSCR you land at. If it comes in under what lenders want, you still have time to raise rents, trim expenses, build some cash, or talk to the bank about an extension instead of finding out at maturity.

    Your $300 a month example is exactly why. That's a lot of fourplexes going from a little positive to break even.

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  • G. Brian DavisPro Member
    Investor · Hatboro, PA · Member since 2016 · 3k+ posts · 867 votes
    21h

    This is where I think the opportunity gets interesting. A lot of these owners aren’t necessarily in trouble, they just have a loan coming due that doesn’t work as well at today’s rates. I’d be looking for those situations before the owner is under pressure. If you can find a property with solid operations and a seller who needs a solution, seller financing could be a pretty interesting option.

    The key is still buying at the right basis. A maturing loan by itself doesn’t make something a good deal.

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