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Refinancing Retail

Retail finance has never been hotter.

Everyone is looking for returns, and domestic and foreign investors have flooded the market with capital. 

Bottom line – it’s a borrower’s market.  But what does that mean for retail investors?

With so much competition surrounding the placement of capital in the market, capital providers are increasingly willing to offer creative finance structures to borrowers. 

Investors, especially those who are balancing both long-term and short-term investments, can benefit from exploring these creative options in order to secure financing that fits their property and investment goals.

For example, for many investors, now is a good time to refinance based on the continued historically low interest rates. 

While many borrowers are evaluating their properties to determine if refinancing makes sense, it’s extremely important to explore options to ensure that the cost of refinancing will be recouped via the subsequent debt service savings.

At Passco Companies, we recently conducted a careful evaluation of our portfolio on a case-by-case basis to determine which of our properties were a fit for a refinance.  Many of our long-term investments were indeed poised for refinancing, and those investments could benefit from locking in a lower long-term fixed rate as their loan maturities are within the next 2 years.

On the other hand, for some of our newer (4 to 7 years) assets, due to the low U.S. Treasury yields, the pre-payment (better know as defesance) penalties and expenses could not be justified. For many of these properties, the financial cost of the defease and refinance wouldn’t even reach the break-even point before the investment’s cycle was complete.

The lesson here is simple – today’s retail investors must be extremely cognizant of the overall goals for their properties when making refinance decisions.

That said, the market and its future remain subjective. When it comes to refinancing, the decision certainly comes down to the individual borrower’s risk aversion. While many believe that interest rates will soon rise, others see the market continuing this low trend for another several years. These borrowers will likely wait for rates to start to increase prior to refinancing, or hold off on refinancing until their properties are more stabilized or significant rent increases take place in current tenants’ leases.

Regardless, all companies should be taking a careful look at their properties to determine if debt service expense-savings opportunities exist, and if these opportunities will fit into their overall business plans.

As Senior Vice President of Investments & Operations for Passco Companies, Mr. Clifton is responsible for negotiating and securing financing for new acquisitions; obtaining refinancing for maturing asset loans; overseeing asset management for Passco Equity Partners; and disposing of select Passco Companies Development assets. The views expressed here are his own.

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