Debt Financing

Terms

The rate is the number every borrower compares, and the smallest part of the loan. The terms underneath it decide whether the deal survives to payoff.

The rate is the number every borrower compares. It is the smallest part of the loan. The terms sitting underneath it, the amortization, the coverage tests, the recourse carve-outs, the prepayment lockout, decide whether a deal survives the years between closing and payoff, and they are where a borrower who read only the rate gets hurt.

This section takes the loan apart, one dial at a time. Each page names the mechanic, shows the math where the math is the point, and lands on the structuring consequence a borrower can act on before signing. Read it from either chair: the borrower deciding what to accept, or the advisor deciding what to flag.

The nine terms are below, in the order a loan presents them.

Inside this hub

Fixed, floating, and the cap you are forced to buy

A floating rate is not just a rate. It is a rate plus a mandatory interest-rate cap whose price you do not control, due for renewal at the worst moment.

The balloon is almost the whole loan

Amortization sets the monthly payment. The term sets the deadline. When they do not match, a balloon waits at maturity, and it is most of what you borrowed.

Cost gets you in, value gets you out

Loan-to-cost sizes the loan that builds the project. Loan-to-value sizes the loan that has to replace it. When finished value lands below cost, the gap is yours.

Debt yield: the number that ignores your rate

Debt-service coverage asks whether income covers the payment. Debt yield asks whether the income justifies the loan at all, and it does not care how low your rate is.

Recourse carve-outs: how a nonrecourse loan comes after you

A nonrecourse loan is nonrecourse until you trip a carve-out. Then the lender can pursue you personally for the whole shortfall, and insolvency alone can be the trigger.

Covenants: default without a missed payment

A borrower can be current on every dollar owed and still be in default because a ratio slipped. Covenants are how a lender takes control before the money runs out.

Why you cannot prepay a securitized loan

On much of commercial real estate debt you cannot simply pay the loan off early. The reason is federal tax law governing the trust that holds it, not the lender.

Reserves, the lockbox, and who holds the cash

Commercial loans decide who controls the property's cash. When a trigger fires, the rent routes to the lender first, and the loan overrides your distribution waterfall.

The extension option you cannot use when you need it

An extension is not guaranteed time. It is time the borrower earns by passing a test, and the deal that needs the extension is usually the one that fails the test.

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Debt Financing 02 Fixed, floating, and the cap you are forced to buy A floating rate is not just a rate. It is a rate plus a mandatory interest-rate cap whose price you do not control, due for renewal at the worst moment.

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