A six month bridge with paid extensions versus twelve months with minimum interest, same 65k piece

Question

Consider a 65k bridge piece behind a 480k senior on a 7 unit, where three units are offline, the plan is to finish them, season the rents about four months, and refinance around month eight at a 1.25 DSCR. Rate is 12% interest only, 2 points, in either structure. The term structure is what actually matters, since the two versions behave very differently when the plan slips. Six months with two 60 day extensions at a point each gives a scheduled, priced decision point twice. If lease up stalls, that structure either pays to wait or supports pushing for a sale while value remains. The tension is that a maturity nobody intends to enforce is a bluff, and enforcing it as a junior lienholder means contending with 480k of senior debt sitting in front, plus whatever standstill period sits in the loan documents. Twelve months flat with a six month minimum interest locks in the interest regardless, so an early payoff at month eight doesn't cost yield. No extension negotiation, no theater. What's given up is any scheduled moment to revisit the file, and if the senior also matures at twelve months, both loans arrive at the wall together. Whether a minimum interest provision actually holds up depends on state law and the drafting, which is a question for a lawyer in the property's state before relying on it. A third option worth considering is setting the maturity inside the senior's, say 60 days short, so there's a built-in reason to be first at the table. That helps in some scenarios and simply makes the junior lender the first to have a problem in others.

dmitri_248 · Answer

The two versions differ in who has to ask for something. Extensions put the borrower in front of you twice with a check in hand. Minimum interest puts nobody in front of you at all and pays you for the privilege. If you write extensions, write the conditions as well as the fee. Current on payments, senior current, no new liens recorded, and a rent roll plus an updated payoff from the senior delivered before the extension takes effect. Otherwise the extension is automatic in practice and you have bought a fee and no information. On minimum interest, the drafting matters more than people think, and how a court treats it varies by state, so that belongs with your attorney where the property sits. It reads better framed as a stated minimum yield earned at closing than as a penalty for paying early. Same money, different posture.

diane_kowalski · Answer

I like the maturity inside the senior's for a reason nobody has said yet. It forces the borrower to solve your loan while the senior is still calm. Once the senior is 30 days from maturity nobody in the room cares about your 65k.

tashaford30 · Answer

@diane_kowalski doesn't that just mean you get told no earlier? If the refi is not ready at month ten it is not ready, and being 60 days ahead of the senior hands cairn a maturity default he probably does not want to act on.

devon_pierce · Answer

Voted extensions. Two priced moments where the operator has to look the lender in the eye are worth more than 3,900.

nicole_adeyemi · Answer

Eight months to refinance on a 7 unit with three units offline reads optimistic. Construction timelines on small multifamily rarely hold, and four months of seasoning assumes the units are leased the day they're finished and the lender accepts four months of history. Some lenders want six months, others want twelve trailing. If the real answer turns out to be month twelve to fourteen, then both of cairn's structures are the wrong length and the extension version at least prices that honestly.

jordan_ellis2 · Answer

What stops the borrower from just deciding the extension points are cheaper than hurrying? A point on 65k is 650. If the delay is worth more than 650 to him he takes the extension every time, and cairn's decision point turns into a toll booth he pays without slowing down.

paulgrant17 · Answer

@jordan_ellis2 that's how lease renewals go too. The fee only changes behavior if it's uncomfortable, and 650 on a 65k loan probably isn't.

megan_doyle15 · Answer

Can someone say plainly what minimum interest means? I read it as, you pay me six months of interest even if you pay me back in two, so 3,900 is the floor. Is that right, and does the borrower usually agree to that?

bmoreno23 · Answer

@megandoyle15 that's how I read it as well, and from what people here have said the borrower agrees because the alternative is losing the deal. The thing I can't get my head around as someone with no deals is how cairn judges whether month eight is real. @nicoleadeyemi says four months of seasoning may not be enough for the refi lender. Cairn, do you ask the borrower which lender he's planning to refinance with and call them yourself, or is that not how it works?

A six month bridge with paid extensions versus twelve months with minimum interest, same 65k piece

9 replies