Andrews: Time is up for non-amortizing debt
I have been hearing from borrowers and lenders alike that underwriting is tightening up for interest-only loans when they come up for renewal. Whether the debt is unsecured, undersecured or fully secured, borrowers can expect loans to be placed on a regular amortization if they have been on an interest-only basis for any period of time. This hits hard at real estate developers who are holding land or who have fully funded development lines of credit and are waiting for the economy to improve. I am also told that underwriters are looking carefully at non-amortizing debt at other institutions when doing their own cash flow projections on borrowers. Rather than consider the current interest-only terms when constructing a global debt coverage ratio, underwriters might assume that the debt will be placed on an amortizing basis eventually and run the numbers based on projected payments of principal and interest. The amortization period assumed can be as short as five years, even for loans fully secured by land. As happens most times, these new rules are coming from bank regulators who have seen a lot of non-amortizing debt and who are trying to get banks to reduce those loan types. So don't get mad at your banker; they like these rules just as much as you do.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Real Estate Services, and he can be reached at firstname.lastname@example.org.)
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