Palisades Financial: Inside Glimpse into Refi Strategy

The refinancing woes of heavyweights like Macklowe Properties and Centro Properties Group are the talk of the real estate finance industry, yet those headline-grabbing cases tell only part of the tale. Investors and lenders nationwide are grappling with the challenges of refinancing properties in a lending environment that has changed drastically since the first half of 2007.     One of the many owners weighing refinancing decisions today is Fort Lee, N.J.-based Palisades Financial. The investment banking firm wants to refinance the acquisition loan on an apartment asset that it bought with a minority partner three years ago in the St. Louis area. David McLain, Palisades’ chief investment officer, estimated the property’s market value at under $50 million. The acquisition loan matures this year, and Palisades is considering two very different quotes to refinance the property.     One lender, an authorized Fannie Mae lender and loan servicer, is offering Palisades a new 10-year mortgage. The other offer, from a major institutional lender, is for a five-year mortgage. At first glance, the choice might look like a no-brainer—the 10-year mortgage rate is about 75 basis points lower than the five-year mortgage rate. “To lock in 10-year money at this low rate will reduce interest costs for the long term,” McLain said.    But there is a twist that is making Palisades think twice. To sweeten the five-year mortgage, the institutional lender is offering a mortgage big enough to reap considerably higher proceeds for Palisades than the 10-year loan will. McLain declined to disclose a dollar figure, but he said the difference in proceeds is sizeable enough for Palisades to give the five-year loan a close look.     Even so, Palisades is leaning toward the 10-year term. One big plus to the longer-term loan is that it would make the property more attractive to a prospective buyer. For example, if Palisades picks the five-year loan and then sells the asset three years from now, the buyer would have only two years left on the loan before having to refinance, McLain explained, and it is all but impossible to gauge what terms will be available at that time. But if Palisades Financial takes the 10-year loan and sells the property in three years, the new owner would get the benefits of the mortgage’s low interest rate for seven years.