Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

What Is the Right Answer to Debt Structuring?

There is no right answer when it comes to structuring debt for a project. The key is to meet your borrowing needs wish list as closely as possible. Some owners are dollar-sensitive, and wish to maximize the loan amount. Other players seek the lowest interest rate, the lowest cost. Alternatively, some borrowers believe that flexibility, in terms of being able to repay the debt with a reasonable prepayment penalty, is the most important element in the loan terms.

Negotiating loan terms requires trade-offs. For example, in general, the lower the loan-to-value ratio, the lower the lender will decrease the spread, and, therefore, the lower the interest rate. The reverse, of course, is also true. The higher the loan-to-value, the higher will be the spread, and the higher the interest rate.

The nature of the lender's source of capital can also impact a borrower's ability to negotiate loan terms. Usually if a lender is originating a portfolio loan, that is, a loan that they intend to keep on the books, then they can be more flexible in structuring the financing. The portfolio loan is different from a conduit loan, in which the intent of the lender is to package the loan into a pool of mortgages, securitize the pool, and sell the security. This process is referred to as collateralized mortgage-backed assets (CMBA). When a lender documents a CMBA loan, its goal is for that loan to fit into the same box as its other loans so they can all be bundled ...