If you haven’t yet heard about the “Wall of Maturities” in the commercial mortgage market, you will soon. Between now and 2017, more than $300 billion in commercial real estate loans will mature and need to be refinanced. This represents more than 2.5 times the amount that matured from 2012 – 2014. It’s significant because while the overall economy has improved, traditional commercial lenders have continued to hold tight reins on lending requirements. These commercial loans coming due were originated before the real estate bust and Great Recession.
When I first heard about the Wall of Maturities, I thought this represented a time of opportunity for business owners and lenders alike. Most of these loans will need to be refinanced and such increased supply is typically a good thing for lenders. Borrowers, now operating in a lower interest rate environment, can potentially get better deals – assuming banks, credit unions and non-bank lenders don’t put them through the ringer.
Sadly, the Wall of Maturities also represents a potentially huge missed opportunity for the U.S. Small Business Administration. During the financial crisis, the government created a provision in its SBA 504 loan program that enabled commercial real estate loans, like many of those maturing now, to be refinanced at low rates and more favorable terms.
For a period of about two years, this refinancing provision offered a needed option for small business owners nationwide. Countless Main Street businesses took advantage of the program as it was one of the few economic recovery programs created specifically for small business owners. (The programs that bailed-out large banks and other big businesses received much more media attention.)
The SBA 504 refinancing program expired in late 2012 and was not renewed, despite the best efforts of hundreds of lenders across the country. SBA 504 Program loan originations have struggled somewhat since the refinance provision ended, and the main losers are America’s small business owners.
With the Wall of Maturities upon us, President Obama, Congress, and the SBA have an opportunity to throw another lifeline to small business owners by bringing back the 504 refinance provision. Otherwise, it may be tough sledding for many business owners with maturing loans.
If your business has a loan maturing in the next two years, here are a few suggestions:
Start shopping now. As with most things in business and finance, preparation is key. My recommendation for any small business owner with a loan maturing in the next 36 months is to start talking with banks, credit unions and non-bank lenders now. Understanding your options as well as the current lending climate is critical to your success in refinancing a commercial loan that is coming due soon.
Be prepared to inject capital. According to commercial real estate data firm Trepp, as many as 20% of the commercial mortgages maturing over the next three years will require additional capital. This will have to come from the current borrowers when the properties are refinanced or from new buyers if a property is sold.
Look at SBA loan options. While the best SBA loan for commercial real estate, the 504 loan, doesn’t allow for refinancing at this particular time, other SBA loans, such as the 7(a) can be used for refinancing under certain conditions. In addition, business owners who are expanding and purchasing new equipment may be eligible for a 504 loan to finance machinery. The Wall of Maturities offers an opportunity to review your entire portfolio and look for strategies to lower costs — and in many instances the SBA programs can be a big help.
Write to Congress. If Congress were to re-instate the 504 refinancing provision, many small business owners would benefit. Expect an industry push for this provision in the very near future, and perhaps Congress and the president will take action before the Wall of Maturities hits its peak in 2016-2017. Let your legislators know that this loan program can offer immediate help to the bottom lines of hundreds of thousands of America’s small businesses.
The good news surrounding the Wall of Maturities is that the commercial mortgage backed securities industry (where loans are packaged for sale on Wall Street) has been steadily strengthening in recent months. The expected wave of refinancing will eventually be completed and absorbed, but those who are best prepared will get the best deals. And if the federal government opens up refinancing to the 504 program once again, hundreds of thousands of small business owners, their employees and the American economy will benefit.