I love words. Most of the time. When used properly they conjure up images that clearly illustrate a concept or clarify a potentially confusing topic. Or they can obfuscate and fuddle facile facts into perplexing predicaments. Know what I mean?
So when I hear my banker friends toss around the term “rightsizing” when discussing upcoming maturities of commercial real estate loans, I have to take note and figure out what will be expected of my borrowers in order to get their debts renewed.
In the corporate world “rightsizing” is typically a polite euphemism for “layoffs” or a reduction in workforce. When first used it served as a politically correct alternative to “downsizing.” An online source offered “rationalization” as a similar concept that I suppose means reducing something to a size that makes sense, at least to someone.
Within the context of commercial real estate loans approaching maturity, the term “rightsizing” can only mean one thing: a paydown is going to be required that reduces the principal balance to a level that makes sense to the lender in the current economic climate. This does not necessarily mean that the loan was “wrongsized” when it was made, but does mean that the climate has changed and lenders have different standards today that will be applied to maturing loans.
Possible scenarios for new standards will include lower loan-to-value ratios, shorter amortizations (that will require paydowns maintain debt coverage ratios), or paydowns to evidence “skin in the game” not initially required.
I cannot say for certain that lenders will require paydowns or rightsizing balances to renew loans. I will say that paydowns are highly likely and would strongly suggest that borrowers have conversations with their lenders well in advance of loan maturities to discuss expectations of what “rightsizing” means to the transaction.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
