A maturity default is not a new scenario, but it has recently become more of a buzzword in investor circles. This is because a record high of $957 billion in commercial real estate loans is on course to mature in 2025—an increase of 3 percent from 2024. One factor contributing to this increase is high interest rates that prompted borrowers to push maturity dates from 2024 into 2025.
Additionally, tenants are not renewing or negotiating leases in the current real estate landscape, making it difficult for owners to get an extension or a new bank loan.. Tighter lending practices also make it difficult for borrowers to refinance their loans, making an impending maturity date even scarier.
With maturity dates looming, what can commercial real estate investors do to avoid defaulting on their loans?
A maturity default happens when a borrower is unable to pay the remaining principal balance when it is due. Even if you have been able to make timely payments for the duration of the loan, a default is still possible if you cannot make the balloon payment.
Common reasons for a maturity default when a loan is expiring include:
What happens when these factors conspire to put you in a tight spot?
The consequences of a maturity default when a loan is expiring might include late fees, penalties, and potential foreclosure. In the long term, a default can also impact your creditworthiness and future borrowing capacity. Avoiding a maturity default is critical for real estate investors who don’t want to turn a financial blip into a climb out of a chasm.
If you are concerned about a maturity default, the first step is to work with your lender to explore your options. After all, your lender has incentives to help you avoid a maturity default. They want to avoid:
To help you avoid a maturity default, your loan workout strategies options might include:
Don’t wait until the last minute to start the conversation. Having more time to negotiate and explore your options puts you in a better position.
If you’re unable to refinance with your existing lender or another traditional bank, you have other options. When your loan isn’t extended, hard money lenders can offer bridge loans or restructuring options to help you avoid defaulting on your original loan, protecting your credit and keeping you in good standing with your lender. If you are working toward selling the property and just need more time, a bridge loan can help you cover the gap.
If the original lender is willing to negotiate a discounted principal, they often require the final payment in cash. A hard money lender can quickly provide this cash so you can negotiate the best possible offer. This is also beneficial when lenders turn down your loan extension at the last minute, even after having given an approval.
Socotra Capital specializes in fast, flexible lending solutions. We work with borrowers to avoid default and find alternative financing. Our hard money loans are based on the equity you have, which means that credit history and non-traditional income streams are less of an issue than with traditional banks.
If you’re curious about what Socotra Capital can do for you, check out our infographic to learn about the various loan types available.