My gap funding borrower said the conversion quit penciling the day the senior lender repriced, not the day costs moved

The structure you want is a rate lock commitment, which senior lenders will sometimes issue for a fee, typically 25 to 50 basis points, that binds their spread for a defined window, usually 60 to 90 days. Most sponsors treat that fee as a waste if the deal closes clean, but from your seat as a gap lender it is really your insurance premium, and you could make reimbursement of that fee a condition of your term sheet without it being unusual.

The thing that changes the picture here is how you define your own exit trigger. Mezz and gap structures in conversion deals almost never include a senior repricing threshold as an event of default or a mandatory equity cure provision, but there is no reason they cannot. Say the senior rate moves more than 50 basis points from the term sheet: your documents require the sponsor to demonstrate coverage at the new rate within 15 days or cure with equity, or you have the right to demand repayment before the first draw. That clause would have given you visibility and negotiating leverage instead of a six-week wait while the sponsor figured out where his $60,000 was coming from.

What was the tenor on your gap position, and did you have any draw controls tied to milestones rather than a lump placement at close?

What you watched happen has a name in underwriting circles: rate lock risk, which is the exposure that sits between a term sheet (a non-binding indication of loan terms) and an actual rate lock or commitment letter. A term sheet is a promise to look seriously at a deal, not a promise to fund at those terms. The senior lender's credit committee can reprice, retrade, or walk right up until the commitment is signed and the rate is locked, and six weeks of due diligence is exactly the window where that happens.

The practical implication for gap and mezzanine underwriting is that your real risk window is longer than it looks. You underwrote to a capital stack that existed on paper. The senior's repricing did not change the building, but it changed the stack, which changed the coverage math, which changed how much equity was actually supporting your position.

A few things gap lenders use to think about this specifically:

Some require the senior commitment letter, with the rate locked or capped, before they fund rather than before close. That shifts the sequence and gives you a more settled stack to underwrite against.

Some stress the debt service coverage ratio (the ratio of the property's net income to its loan payments) at the senior's rate plus 100 or 150 basis points when they build their own model, just to see what equity cushion survives a reprice. If the sponsor's equity evaporates under that stress, the question is who absorbs the next surprise.

Some negotiate a clause that triggers a sponsor equity cure obligation before the gap lender's terms are affected. Your sponsor did this informally because he had the cash. A formal cure provision makes it a contractual requirement rather than a favor.

I want to flag one thing I am genuinely uncertain about: whether specific cure language is standard in Memphis-market mezz deals or whether it would require negotiation. A real estate attorney who works on capital stack documents would be the right person to confirm that.

What did your term sheet with the sponsor say, if anything, about senior repricing before close?

The assumption doing the most work in your original underwriting was that the term sheet was a proxy for the rate. It is not. A term sheet is a letter of intent with a credit committee behind it, and that committee has its own timeline, its own internal watchlist categories, and its own appetite that can shift between the day the term sheet issues and the day the loan docs are signed. The 80 basis point reprice was not a market move. It was a committee move, and those two things behave differently.

The risk you are naming is commitment risk, specifically the gap between a term sheet and a binding rate lock. On a six-month conversion timeline, that gap is where you lived for four months. Your gap position sat junior to a senior obligation whose final terms were not yet fixed when your money went in.

A few structures that address this directly, each with a tradeoff. First, a funded interest reserve sized to absorb a defined reprice band, say 100 basis points, built into the capital stack before close. This costs the sponsor carry but it converts the repricing event from a liquidity crisis into a modeled scenario. Second, a rate lock or forward rate lock on the senior, negotiated as a closing condition on the gap. Lenders resist this because it costs them optionality, but it is negotiable on the right deal size. Third, explicit reprice triggers written into the gap agreement, where a senior rate increase above a threshold gives you the right to call additional equity from the sponsor before you fund the next tranche. This puts the burden on the sponsor to either hedge the senior or hold dry powder.

The risk you did not mention: if that $60,000 had not existed, your exit as a gap lender on a half-converted 28-unit building in Memphis is a distressed asset sale at a discount that likely wipes your return even if your principal survives.

What was the structure of your gap tranche, full funding at close or tranche draws tied to construction milestones?