The real estate market in Los Angeles and Orange County is currently facing a significant challenge as a substantial amount of debt tied to commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLO) is set to mature in 2024. This impending maturity, coupled with the current economic climate, has raised concerns about the ability of property owners to refinance their loans and has put a spotlight on the potential impact on property tax. In this article, we will explore the implications of the maturing CMBS loans on property tax in Los Angeles and Orange County and discuss the strategies property owners can employ to navigate this challenging situation.
The Wall of Maturities
The staggering amount of debt maturing in 2024, estimated to be around $21 billion, is part of what experts are calling "the wall of maturities." In the years leading up to 2024, when debt was cheap due to the Federal Reserve's decision to hold interest rates near zero, many property owners flocked to the capital markets to refinance their commercial properties. However, with the current rise in interest rates, refinancing has become a significant challenge. This has led to a rise in defaults and property owners walking away from their properties, leaving lenders to deal with the consequences.
The Impact on Property Tax
As property owners struggle to refinance their loans, the impact on property tax becomes a critical concern. When a neighboring property goes into default or is abandoned, it can have a direct effect on the area market value and, consequently, can be used to lower the property taxes on other properties. The local tax authorities rely on market sales and lease information to determine the tax liability of each property owner. If a property's value decreases due to financial distress, it can result in a lower assessed value and, therefore, a reduction in property tax revenue for the local government.
Property Tax Appeal: A Potential Solution
One strategy that property owners can employ to mitigate the impact of maturing CMBS loans on property tax is to file a property tax appeal. Property tax appeals provide property owners with an opportunity to contest the assessed value of their properties and potentially lower their tax liability. By presenting evidence of financial distress, such as default on a loan or abandonment, property owners can argue for a reduction in their assessed value, thereby reducing their property tax burden.
The Role of Property Tax Consultants
Navigating the property tax appeal process can be complex and time-consuming. This is where property tax consultants can play a crucial role. Property tax consultants are professionals who specialize in helping property owners navigate the property tax appeal process and maximize their chances of success. They have in-depth knowledge of local property tax laws, assessment procedures, and valuation techniques. By leveraging their expertise, property owners can ensure that their property tax appeal is accurately prepared and effectively presented.
The Challenges of Refinancing
One of the primary reasons property owners are facing challenges in refinancing their loans is the significant increase in the cost of debt. While debt was cheap in 2020 and 2021, the rise in interest rates has made refinancing a daunting task. The higher cost of debt makes it difficult for property owners to secure favorable loan terms, which can lead to a higher debt burden and potentially impact their ability to meet their property tax obligations.
Limited Access to Capital for Potential Buyers
The challenges in refinancing also extend to potential buyers of distressed properties. As property owners struggle to secure favorable loan terms, potential buyers face a similar challenge in accessing capital. This limited access to capital can deter potential buyers from investing in distressed properties, further exacerbating the challenges faced by property owners in refinancing their loans.
The Role of Property Tax in Refinancing
In addition to the increased cost of debt, property tax obligations also play a crucial role in the refinancing process. Lenders consider a property's ability to generate sufficient income to cover its debt payments, including property tax when evaluating loan applications. If property tax obligations are high, it can impact a property's cash flow and its attractiveness to lenders. This can further complicate the refinancing process for property owners.
Property Types Most Affected
The maturing CMBS loans are spread across various property types in Los Angeles and Orange County. According to data from Morningstar Credit Analytics, approximately 30% of the loans coming due are tied to retail properties, including regional malls. Another 22% are tied to office buildings, and 19% are tied to multifamily properties. The remaining loans are backed by hotels, industrial properties, self-storage facilities, and other mixed-use assets.
Case Studies: Performances of Selected Properties
Despite the challenges posed by the maturing CMBS loans, some properties seem to be performing well. For example, debt tied to Blackstone and Worthe Real Estate Group's 2 million-square-foot office portfolio in Burbank appears to be in good standing. The $660 million in CMBS loans for this portfolio have a fixed interest rate of 3.54%, making the rise in interest rates more bearable for the owners. As of September, the properties were 91% occupied, according to Morningstar.
Case Study: One California Plaza
Photo Courtesy of: CoStar.com
One California Plaza, a 1 million-square-foot office tower located at 300 South Grand Avenue in Downtown Los Angeles, presents an interesting case. Despite facing financial challenges, the property's income is just enough to cover its debt payments due to an increase in operating expenses. Morningstar's special servicer commentary noted that the property's debt service coverage ratio was low, which is a metric used to compare the cost of debt payments to the income generated by the property.
Case Study: Office Towers in Downtown Los Angeles
Photo Courtesy of: CoStar.com
Two separate office towers in Downtown Los Angeles, Rising Realty's One California Plaza and Brookfield's Bank of America Plaza, are also facing maturing CMBS loans this year. One California Plaza, with a $300 million loan, is set to mature in November, while Bank of America Plaza, with a loan of about $377 million, is due in September. The performance and potential impact of these properties on property tax will be closely monitored as the maturity dates approach.
Conclusion
The maturing CMBS loans in Los Angeles and Orange County present a significant challenge for property owners. The impact on property tax, in particular, raises concerns about reduced property tax revenue for local governments. However, property owners have options to navigate this challenging situation, such as filing property tax appeals and seeking the assistance of property tax consultants. By employing these strategies and closely monitoring the performance of their properties, owners can strive to minimize the financial burden and ensure a more favorable outcome in the face of maturing CMBS loans.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as legal or financial advice. Property owners are advised to consult with professionals regarding their specific circumstances.