My cold storage borrower in Stockton paid off 14 months early and I lost $31,000 in interest I had already mentally spent.

The floor structure you landed on is correct, and the framing matters: you are pricing an option, and options have value independent of whether they get exercised. What most private lenders miss is that the floor still needs to account for reinvestment drag, not just the lost coupon. If your borrower pays off at month 14 and it takes you six to eight weeks to redeploy into a comparable note, the 18-month floor recovers the coupon you modeled but does nothing for the compounding gap on idle capital. On a $1.4M position at 11.5 percent, eight weeks of dead money is roughly $25,000 before you factor in any origination costs on the new deal. The floor solves the income problem; it does not solve the timing problem.

The risk I have not seen mentioned here is what that floor structure does to your borrower pool over time. Lenders who move to hard floors rather than soft prepay penalties tend to self-select toward borrowers who either cannot get bank financing at all or who are confident the project will run long, which means you are gradually concentrating toward the slower-velocity, higher-complexity deals and away from the clean execution borrowers like the one who just refinanced you out. That Stockton borrower found a bank at 90 percent occupancy and paid you off, which is the outcome you want in a portfolio: low loss given default, full principal return, no extension headaches. Pricing him out of your next deal is not obviously the right call. What is your current pipeline mix between repeat borrowers and first-time sponsors, and have you seen any pushback on the floor from borrowers who have done multiple deals with you?

The diagnosis is right. You were short an embedded call option and charged three months of premium for what turned out to be roughly ten months of optionality. The borrower optimized rationally and you bore the cost.

The assumption doing the most work in your original structure was that a stabilizing commercial asset would not attract conventional financing until term. A cold storage building at 90 percent occupancy in a secondary market is exactly the profile a regional bank will underwrite once the rent roll is seasoned. You priced a bridge loan but you were actually writing a lease-up option, and those are two different instruments with different prepayment exposure.

The 18-month interest floor is a sound structural response, but it transfers risk in a way that some borrowers will price into their next lender search. The risk you have not named here is adverse selection: borrowers who expect to exit early will shop around your floor, and the ones who accept it are more likely to need the full term for reasons that may include slower stabilization than projected. Your floor protects yield on the clean exits and concentrates collateral exposure on the deals that run long because they ran into trouble.

One structural alternative worth considering is a yield maintenance clause rather than a flat floor, where early payoff requires the borrower to make you whole on a present-value basis against the remaining scheduled interest. It is more friction to document and requires a licensed attorney to draft cleanly, so get a real estate finance lawyer involved before you modify your template. Confirm how your jurisdiction treats yield maintenance versus prepayment penalties, because those are treated differently in some states and your lender counsel needs to advise on that in writing.

On your current floor structure: are you quoting the 18-month minimum as part of the rate conversation upfront, or presenting it as a term the borrower encounters later in the commitment letter?