Future Debt Funding for TI/LCs and CapEx on Value Add Deals
Im looking at a deal that involves future debt funding for TI/LCs and CapEx. Lender is obligated to pay call it 50% of future TI/LC's and CapEx up to $10MM, upon which the Sponsor is on the hook for the remaining TI/LCs and CapEx, total cost is $15MM. $10MM Lender funded and $5MM Sponsor.
Assuming the schedule of these expenses is irregular (i.e. $2MM Yr 1, $500k Yr 2, $3MM.......$750k Yr 5), how would I best model an accurate balance of future funding paid by the lender up until the $10MM future funding limit? After the lender has paid their share up to the future funding limit ($10MM), the Sponsor will be responsible for remaining future funding($5MM).
Any advice would be appreciated. Thanks
I think you are making this more complicated than it needs to be, but perhaps I'm misunderstanding your question.
First off, out of curiosity- is the 50% future funding something you are making an assumption about? Or do you know for certain that that's how the deal is being capitalized? Typically on these transitional deals, it's in the lender's best interest to adequately reserve for TI/LC dollars that the borrower can draw from throughout the term of the loan.
As for the modeling of the deal, you can build out a shortfall reserve based on your CapEx budget. A lender will indicate in their term sheet exactly how much money they'll be allocating to the reserve. Once the deal is signed up, the lender will have to approve the budget, but the borrower essentially has free reign throughout the term of the loan as to when they want to fund those CapEx dollars. However, I have seen lender's determine how frequently draws can occur, as well as a minimum draw amount.
Hope this helps.
Adding on to this, most don't want you drawing small amounts every month so you'll probably have no more than x per y days. Additionally, some lenders have forced funding to make sure you spend the allocated amount but some don't. A lot of lenders will want Pari passu for the future funding so that the borrower will continue to put equity in. Why wouldn't you up the loan amount so that you can continue to put in 50% or drop the %?
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