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How to Read a Real Estate Loan Agreement: A Practitioner's Guide to Covenants, Cash Traps, Recourse and What Happens When the Test Is Missed
Paperback
Series: How to Read the Deal Documents
Investing & FinanceReal Estate
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Publisher: Independently Published
Pages: 124
Weight: 0.39
Height: 0.26 Width: 6.00 Depth: 9.00
Language: English
Reserve deposits take 121 basis points before anything is distributed. A debt service reserve of 1,388,830 dollars must be funded at closing out of equity the model treated as invested in the building. The lender's own definition of net operating income turns 1.395 times coverage into 1.210 - one percent of income away from a cash trap on the day of closing.
None of that is in the term sheet. All of it is in the loan agreement.
The document arrives late, runs to a hundred and fifty pages, and is reviewed by counsel who are asked whether the terms are market. The question nobody asks is the commercial one: what does this do to my cash flow, my flexibility and my downside?
What the book covers- The three sizing tests - loan to value, coverage, debt yield - and what the binding one tells you to negotiate
- The mortgage constant, and why amortization matters more than fifteen basis points of rate
- Hedging - the cap the lender requires, the strike that actually protects the borrower, and the gap between them
- What the loan costs - fees, reserves, and the all-in rate including the exit
- The covenant ladder - translating every ratio into the decline in income that reaches it
- Coverage, and why the definition is the covenant
- Debt yield and loan to value - the two tests that cannot be engineered
- Cash management - lockbox, waterfall, and the difference between a trap and a sweep
- Reserves - what is a cost, what is only timing, and the springing deposit nobody models
- Cure rights - what you can fix, how often, and at what price
- Prepayment - lockout, step-down, yield maintenance and defeasance, priced
- The extension option, and why it fails exactly when it is needed
- Recourse - loss carve-outs, springing carve-outs, and every other guaranty
- Transfers, reporting, default, mezzanine and the workout
One financing, every number reproducible:
- Loan to value binds at 60 percent; coverage would have supported 67.0 percent and debt yield 69.4 percent
- The covenant ladder: cash trapped at -14.0 percent of income, swept at -21.2, in default at -24.7
- A cure by deposit costs 233,192 dollars; the same cure by prepayment costs 2,602,535
- Prepaying in year three costs between 1,074,929 and 4,821,005 depending on the mechanism
- And a springing recourse carve-out turns a loan on which the lender loses nothing at a thirty percent decline in value into a 34,762,591 dollar personal obligation
Also included: a complete loan abstract template field by field, forty red flags, three timed practice cases with full solutions, the questions worth asking a lender at the term sheet stage and in a difficult quarter, and a glossary.
There is no sample clause language in this book, deliberately - documentation varies too much to memorize, and what does not vary is the question each provision answers. The book asserts no jurisdiction's law, and no lender, borrower, property or loan is named. This is a guide to commercial architecture: not legal advice, and not a substitute for it, but it will make you a considerably better client of the people who give it.
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