When the exit slips on a 12 month bridge, who pays for the extension?

Question

Take a 12-month bridge with a 6-month extension option at one point. The sponsor's exit is a DSCR refinance on a stabilized 8-unit, and the pro forma has certificates of occupancy at month 7 and full lease-up by month 10. The underwriter's problem is that there is no honest basis for pricing the probability of a slip. Assume the plan holds and the deal prices one way. Assume it runs 15 months and the sponsor eats another point plus three months of interest, and the question becomes whether they have the reserves for that or whether the lender gets a rescue call instead. So, for people underwriting these: is the extension priced as a coin flip and reserved for, or is the base case underwritten at 14 months with the sponsor left to argue it down? And is the takeout stressed at today's rates or at the sponsor's assumed refi rate?

jessreyes12 · Answer

Before the pricing, what actually happens on day 366 if the refi isn't ready and they've already used the extension? Does the rate step to default interest, and at what number? I've seen 18% to 24% mentioned and I don't know if that's typical or the scary end.

monica_tran3 · Answer

The month 7 certificate of occupancy is the number to push on. Final inspections and the utility connection are outside the sponsor's control, and in many jurisdictions they routinely add six to ten weeks. A 12-month plan with permits in it is usually a 14-month plan wearing a 12-month schedule.

mitchell_ray4 · Answer

Panel upgrades are the quiet killer on lease-up timelines. If the service has to be increased the utility schedules it when they schedule it, and eight weeks isn't unusual. No amount of extension fee makes that faster.

renee_dubois · Answer

Stabilized doesn't mean full. Most DSCR and agency takeouts want 90 days of trailing collected rent, sometimes 90% occupancy for three consecutive months. So the clock on the refinance starts after that seasoning runs rather than when the last unit signs. That alone is a quarter nobody puts in the pro forma.

nicole_adeyemi · Answer

Bridge money on anything with a discretionary approval in the path is a bet on a hearing calendar, and hearing calendars get continued for reasons that have nothing to do with your borrower. If the exit needs a public body to say yes, the term should be double what the sponsor thinks.

carlos_nunez · Answer

The extension point is cheap. What hurts is three extra months of interest on a loan sized to a construction budget that already went over, because the overrun and the delay are the same event. A sponsor who is short on the rehab will be short on the extension too, and the lender finds out in the same phone call.

tashaford30 · Answer

The part still worth pressing is the takeout. Nobody knows where rates sit in 14 months, so stressing the refinance at today's coupon is only half an answer. Does the underwriting pick a shocked rate and check whether the DSCR still clears at that number, or is the plan being priced flat?

When the exit slips on a 12 month bridge, who pays for the extension?

7 replies