“It’s extremely critical,” Porras said. “When you’re in a loan, your financial covenants increase, and your debt yield goes up every year. Your debt service coverage ratio goes up every year. If you’re not operating efficiently, you can’t meet it. Now your property goes into a cash trap, where they pretty much take all the cash available, and give you a little bit for operating, and then that’s just the death knell for the property. It’s very hard to get out of that.”
When properties reach the cash trap stage, it becomes difficult to find a solution for the property. In many cases, these properties must be put up for sale.
“You’ve got to go out to market,” he said. “You can’t refinance because your property is not performing, so the lender is going to come in and maybe give you less money than what your loan is worth. You may have to put more money into the property, and you’ve got to make a capital call, and that’s not going to be good. Capital calls for financing are not going to be looked upon very well.”
The role of CRE brokers
In a challenging market, Porras believes that mortgage brokers play a critical role in getting deals done.
“They provide a very, very important role, because they obviously have a vast network, not only of equity partners, if that’s the direction you go, but of lenders,” Porras said. “So it’s important to develop a good relationship with a broker.”