Over the last 30 days we have seen a wild swing in rates.  There are many borrowers who always consider delaying the refinance and locking in a rate at a later date.  In real estate, ANY well positioned deal should work below 5% for sure.  Though we all want the absolute best rate possible, trying to pick a bottom is fruitless.  As I have said before, if we really knew where rates were going, we could make a ton of very easy money.

Also sellers and buyers of income property should remind themselves that deals will not work at low cap rates when the debt spread is less than 2%.  Because of that, cap rates will go up before declining any further.

Since the last newsletter, the 10-year Treasury dipped to 1.77 only to sporadically move up to near the year high of 2.15.  The swap stack on top of that of 12 bps results in a swap rate of 2.27.  A HUGE move over the last two weeks.

Here are quotes we were able to obtain over the last month:
Multifamily Rates:

HUD 223F – Low was 3.05%.  Today it is 3.30%.
Insurance Quote – Forward rate to July 31:  4%.  This is gone.
FNMA – Low was at 3.80% for full leverage.  Today it is 4%.
CMBS – Low was 3.75%.  Today it is 4%.

Product spread summary:  
Multifamily:  Full leverage at 180 bps over 10-Year Swap to 225 bps.  65% LTV ratio or less takes off 15 bps generally.

All other product types:  Full leverage at 190 BPS over 10-Year Swap to 240 BP.


We run calculations for clients all the time considering whether or not they should defease a loan.  There are three considerations to this calculation:

1.  What is the cost to defease?
2.  What is the savings you benefit from the lower payment?
3.  Where do you really think interest rates will be at the current maturity date?  Consider the increase or decrease anticipated.


1.  Cost for $10,000,000 to be paid off in 1 year:  $450,000.
2.  New Rate:  4.25%.  Old Rate:  5.25%; Savings:  $100,000.
3.  If rates are the same in one year, the effective loss is $350,000.  If rates move down the loss is greater.   If rates move up 50 basis points from today, then the savings going forward is $50,000 annually.  Over 10 years the savings is $500,000 based on the refinanced rate and the increased rate.  

Total savings over a 10-year period is $600,000.  The amount spent to realize the $600,000 savings was $450,000 IF RATES MOVED UP 50 basis points from today’s levels.  Now this is a very simple illustration, which yielded about a 7% return on cost in this example.  We can provide a detailed illustration utilizing deal specifics, net present value and IRR targets.  The bottom line is if rate movement is anticipated over the next 12 months of 50 basis points or more, a defeasance evaluation should be made.

Have great coming weeks until the next report, and please reach out to us with any financing requests, defeasance evaluation or market information!  We are here to serve you!