"Long Story Short" – Ten Reasons for Locking into Long-Term Realty Financing
Chicago, Illinois, September 19, 2007 — Since December, the yield curve remains inverted, suggesting the looming threat of a recession and credit market turmoil. However, the previous time the yield curve inverted within the past decade, a recession did not occur. This phenomenon has proven to be a result of domestic and international investors flocking to longer-term, US debt instruments. The winners, of course, are long-term borrowers. Here is why:
1). Abundant supply funds and lenders (although pricing is readjusted to closer reflect risks in subprime debt)
2). Amortization schedules flexible, including interest-only
3). Best spreads and lowest rates as compared with other shorter terms
4). Ideal for fixed-income, cash flow (e.g., single tenant, credit lease)
5). Nearly all types of income-properties with provable cash flow are suitable
6). Long-term protection against inflation and rate increases, as rates are locked
7). Property will be worth more with below-market debt, should interest rates increase
8). Closing costs and bundled third-party fees are competitively priced and spread out over a longer term
9). Flexible loan payoff provisions are negotiable at an additional charge
10). Various leverage levels provide additional discounts and pricing options
The main risks of locking into long-term debt include: short-term hold/sell strategy, interest rate declines create lower asset values, limited flexibility for additional loan proceeds and restrictive prepayment provisions.
The Real Estate Capital Institute’s research director, Nat Zvislo, says “ten-year-term loans are often priced 15 to 20 basis points lower than shorter-term debt of five to seven years as mortgage buyers prefer longer-term notes.”