What does loan term "3+1+1" mean?
Any input on when this loan type is utilized and those terms would be really helpful. This is in reference to a MF property.
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The +1 (yr.) will typically be extensions that are available to the original loan term (3 yrs.).
Yes and be aware that the extensions may require certain coverage thresholds, as well as a fee (10-25bps)
These are most typical in bridge/construction products. The idea is that there are 3 years to execute the strategy and additional extensions are available if more time/seasoning is required
Also seen 3 +1 +1 if there is uncertainty for an anchor with little term or competing redevelopment close in proximity,. lender was risk-adverse
Awesome, great stuff. Thank you. I know its simple but couldnt get any info.
So if I understand this correctly...assuming the loan is being offered as I/O only for 3 years, the 1+1 extension could allow us to extend the loan for up to 2 more years on a I/O basis? Considering the fees and maintaining covenants/thresholds of course.
Also, are these loans generally fixed or floating? I'm assuming its possible for either but what is the most common?
Many lenders are going to want amortization for the extensions.
Floating rate is the most common.
Watch out for the language around the extension options. Could potentially be subject to an appraisal.
Every single thing that you mentioned is negotiable.
If you're asking for IO, then you might be offered IO for the initial term and then 30 year amortization during the extension options. Depending how competitive it is and the overall leverage, maybe you can get IO in one or both of the extension options.
There would be DY or DSCR, LTV, maybe occupancy tests and a fee paid.
Bank debt is almost always floating. CMBS is fixed. LifeCo debt is typically fixed I believe.
what does "DY" stand for in your above comment?
I work for BB in a BS group and 3 + 1 + 1 has been our most popular term this year by a long shot. As said above in most cases the extensions require amortization and are subject to some form of DY test (Usually a 10-12%). If a property isn't hitting this threshold we usually require some sort of principle pay down in order to meet this DY test.
Which markets and property types do you predominantly focus on if I may ask? I am just curious, because that DY requirement seems a bit stringent. We were able to finance at 7.5%. Thanks in advance.
Work specifically financing Hospitality properties in all markets. We are pretty conservative and will usually find a way to get any deal done above a 10% but for our extensions we want at least a 12 (Even if that requires a paydown or accelerated amort).
Bridge offerings are typically 3 + 1 + 1. 3 year initial, then two option periods. Debt fund extensions are interest only but subject to DY yield tests, with typically a .25 extension fee and .25 rate bump. CRESEA nailed it. Basically it's a 3 year stabilization period and if your business plan is going slower than anticipated you use the extension periods.
I come from a corporate credit background, and don't know anything about RE. Do the extension options require lender consent, or are they essentially at the borrower's option subject to some of the items noted above (e.g. DSCR, fee, etc.)?
There is always some kind of performance test to get each extension. Most common is a Debt Yield hurdle. DSCR and appraised LTV tests are also common. You also often see a combination of DY LTV and DSCR. Options are borrowers choice given they meet the required tests. Lender doesn't care if business plan is getting executed.
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