Jeff Erxleben contributed his expertise to National Real Estate Investor’s article titled “CRE lenders try to hold on to underwriting discipline to avoid future refi risk.”
The story notes how the drop in interest rates has been great news for borrowers, with low cost of capital effectively giving them more buying power. Yet, for the most part, lenders are keeping borrowers in check on leverage and structuring deals with an eye on an easy exit at maturity.
“There’s a lot of data that goes into refinance tests, and that data definitely helps the lender get comfortable with the refi risk coming out in the future,” said Erxleben. “The guiding principal these days is underwriting a long-term loan at a debt service coverage ratio (DSCR) of 1.25x.”
He went on to add that, “Depending on the asset and underlying economics in terms of purchase price and valuation, that 1.25x usually covers leverage on the top end at 75 percent loan-to-value (LTV) and 60-65 percent for coastal assets. I think that combination of having that cash equity, along with the supportive market data and historical performance of the markets that those long-term lenders are in, gets them comfortable with that refi test risk.”