Refinance Period Limited

By: Sean Wellington - CPN Online

Boston - June 13, 2001 - With interest rates down and buyers looking for deals, investors are more and more likely to consider refinancing as a better option than selling. But it is not always a simple decision and there may not be much time to make it.

New Boston Fund Inc. recently acquired a three-building portfolio for $12 million and has already been offered $17 million to sell, said president Jerry Rappaport. But he wants at least another $1 million on the deal. "We'd probably make more money refinancing and operating it. We'd get all the equity back ($2.5 to $3 million) and then make $600,000 a year." The healthy profit from a sale is also a lure, leaving Rappaport undecided.

While The Shorenstein Co. is actively looking to acquire office properties, it has also considered the refinance-or-sell quandary. The California-based company transacted five major refinancings in the last six months, according to chief investment officer John Grassi, and has no intentions of selling any of its properties in the immediate future. One example is San Francisco's landmark 1.8 million-square-foot Bank of America Center, which at the end of February was close to having a new owner in place. Instead, the deal fell through, with Shorenstein deciding to refinance the property.

In many cases such choices are contingent upon how much value has been created by the owner. If an asset was purchased late in the cycle, said Gene Diaz, chief investment officer at Gale & Wentworth L.L.C., a company might have refinancing as its only option. Even if the owner does not lose money if it is unable to meet investors' expectations, it will likely have a more difficult time securing funding in the future, as lenders' and investors' criteria for underwriting has tightened in response to the softening market.

Underwriting standards are already tough. "It's difficult to find a high loan-to-value ratio in terms of coverage," noted Karen Dorigan, chief investment officer at CarrAmerica Realty Corp. Despite this, the debt market is creating opportunities to restructure deals on a favorable basis, especially with mezzanine funds, which bodes well for both refinancing and selling assets. Creative financing, most notably the use of debt, can help bridge the bid/ask spread. "With the equity markets on the sidelines, there has rarely been a time when the debt markets are more important to what equity investors will pay," said Glenn Whitmore, senior managing director at Holliday Fenoglio Fowler L.P.

The time to refinance may be limited, however, as many life insurance companies may be overallocated in their real estate debt placements sooner rather than later. "My bet is, if people don't get their loan done in the first three quarters, there won't be a lot doing in the fourth," noted Rappaport.

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