Rational behind a lender choosing a loan term
Debt Folks, have a question- Is there a science behind the loan term chosen by the lenders? For example, a deal I am involved with is a single tenant industrial deal where there are four years left in the lease. Tenant is B+ rated tenant, solid tenant. Will any lender be willing to lend on a long term 5, 7 or 10 year term? Or is the only option a short term 2 year bridge loan and once it gets stabilized with a longer term lease, then refinance with a longer term loan? I have a 2 year loan term quote from a national bank, so I was wondering whats the reasoning that goes behind a lender choosing a a 2 year loan vs 5 or 7 years? Because even with a 2 year loan, there is a chance that the tenant does not renew the lease and there is not a lot of interest from lenders wanting to refinance this loan at the 3rd year with the tenant not renewing, so why a 2 yr loan and not a longer term loan? I am failing to see how the lender is minimizing risk by offering a 2 yr loan. I was thinking a 5, 7 or 10 year loan with reserves held back for a possible shortfall in year 3 or 4 can still be worthwhile for a lender. Thank you for any help, appreciate it!
Yes it does. It gives them two years to put pressure on the landlord and tenant to strike a deal. They control any extensions. Even if your DOT has built in extensions, they lender can totally kill those btw. So, they may have three years now to force a scenario where they can land a longer lease and refi the deal.
Also, gotta keep the auditors/regulators happy. And if it's commercial (which it is) vs multifamily, it has larger reserve requirements. So, as strong as your tenant is, banks have to keep an eye on their balance sheet.
I talk with my bankers on the regular about how they think and why their LOI is what it is. A regional lender here in SoCal is pursuing low income/section 8 apartment deals because of some shit called CRA. Never heard of it cause I'm not a banker. Anyway...brought them a 3.5mil apartment purchase, 16 units and 11 are Section 8 (subsidized). They want the loan because it shows that they're not "redlining" or "black-balling" certain neighborhoods and/or demographics. Apparently they have to report this stuff to the regulators and meet certain metrics.
Terms are usually based upon rollover/exit metrics.
The theory behind a 2 year loan is that when the loan matures, there will still be 2 years left on the lease. Generally speaking there will most likely be a bridge lender that will do the takeout, requiring structure for the rollover (either sweep the cash for the 2 years if that is enough to cover TI/LC costs, fund a reserve at closing or structure a hold-back/good-news money). That bridge money is going to be much more expensive than L+250.
You wouldn't do a 5 year because the exit is too risky. Even with reserves, if you figure 9 months of downtime between leases, your new lease would just be staring, TI/LCs would be due, and potentially free rent would all be happening at maturity. Unless you are loan-to-own, lenders don't make it a habit to structure themselves into a hole where they would have to do a modification/workout at maturity.
You might do a 7 year if you believed in the market/borrower. But this would require structure around the rollover. However, there isn't a whole lot of 7 year floating money available (most banks like to stay in the 5 year floating market unless it is an A+ asset).
And to play in the 7-10 year fixed market to get to some of the lifecos/balance sheet lenders, this deal would have to be 20+ million. You might be able to go CMBS, but single-tenant isn't exactly on the top of their wish list.