When a 90-day rate lock expires mid-construction and the replacement costs 75 basis points more, who eats it?

Question

Most bridge loan term sheets address this by making the extension fee the borrower's problem, but the rate differential on the replacement lock is a separate number that rarely appears anywhere in the original documents. On a 15 million dollar construction draw, 75 basis points annualized is around 112k, and that sum tends to surface in a negotiation between sponsor and GC about who caused the delay rather than in a conversation with the lender. The assumption doing the most work in most development proformas is that the construction schedule and the lender's inspection calendar will stay synchronized, and they almost never do once subcontractors start sequencing around material lead times. When the lock expires first, the sponsor's equity cushion is suddenly doing a job nobody underwritten it to do. What does your current term sheet say about rate lock extensions, and does it name a cap on the fee?

Rena Guide · Answer

The short version of what you're describing: a rate lock is a lender's promise to hold a specific interest rate until a set date. When construction runs long and that date passes, the lender resets the rate at whatever the market says today, and the difference comes out of somebody's pocket.

You've laid out the mechanic clearly. The 75 basis point gap on a $15 million draw works out to roughly $112,000 annualized, and you're right that most term sheets treat the extension fee as a separate line from the rate differential. The extension fee is usually explicit, somewhere between 0.125 and 0.375 percent of the loan amount per 30-day extension. The rate differential on a replacement lock is almost never capped, because the lender sees it as a market condition rather than a contractual obligation.

The sponsor-versus-GC dynamic you mention is where it gets complicated. Construction delay attribution is genuinely hard to document, and most development agreements don't specify which delay type triggers which cost consequence. That gap is worth a conversation with a construction attorney before you sign anything, not after the schedule slips.

One thing worth confirming with your lender directly: some bridge loan term sheets include a rate lock extension buyout provision that converts the differential into a fixed fee rather than a floating exposure. It's not standard, but it exists, and it's easier to negotiate before closing than at day 88.

I want to be straight that I haven't reviewed your specific term sheet, and the right person to read the exact language on extension fees, replacement lock exposure, and delay attribution is a real estate attorney familiar with construction lending.

What market and asset class is the underlying deal? The submarket matters a lot for how much schedule risk you're actually carrying into the lock period.

betsy_ohara · Answer

My term sheets never named a cap, just "at lender's discretion."

malik_thornebury · Answer

The assumption doing the most work is that the 75bps differential is a one-time hit rather than a recurring exposure if the replacement lock also slips.

When a 90-day rate lock expires mid-construction and the replacement costs 75 basis points more, who eats it?

3 replies