How much to pay to avoid a loan maturing after the lease expires

The multifamily version of this problem is instructive. A multifamily refinance is priced off the rent roll, and a rent roll refills itself. A single tenant box does not. Showing up at year 7 with 24 months of lease left is a different negotiation from showing up at year 3 with 6 years left, and the 60 basis points saved does not cover a lender repricing the whole loan. Tender, does the 12 year quote have a prepayment structure that lets you get out if the tenant renews early?

Worth asking the obvious thing from the buyer's seat. If the tenant leaves at year 9 and the loan still has three years to run, what actually happens to the owner? A payment is due with no rent coming in, funded out of pocket, while the owner tries to find someone to take a purpose built box in a town they may never visit. That is the scenario that ends the whole thing, and it happens under either quote.

Marlow, it ends the same way under both quotes, and the difference is who is holding the problem when it lands. On the shorter term the lender forces the conversation at year 7 while you still have income and options. On the longer term you carry it alone. The pattern through the 2024 and 2025 reset was that the sponsors who came through were the ones whose maturities did not stack on top of a rollover. Nobody underwrites two problems arriving in the same quarter and then plans for it.

The shorter term and the better rate is the stronger choice, provided you behave like the balloon is real from day one. That means banking the difference instead of spending it, and opening the renewal conversation with the tenant at year 5 rather than waiting for year 8. Tender, one thing missing from your setup is whether the tenant's options are at fixed rents or at market. If they are fixed and below market, a renewal is close to automatic and the whole overlap question gets smaller. If they are at market, the tenant has every reason to wait you out.

When people say the lender prices against dark value, what number are they actually using? Is that a broker's opinion of what an empty 9,000 sf box sells for, or is it something the appraiser calculates from a re-tenanting assumption? Because those feel like they could be 30% apart and the answer decides whether the refinance at year 7 is uncomfortable or impossible.

Compass, it is the appraisal, and it is built from a re-tenant assumption, so it moves with whatever the appraiser believes about downtime and TI. That is why it swings. Tender, run the two quotes on a $2.4m loan at 65% of a $3.7m price. The 60 basis point gap is about $14,400 a year of interest, call it $101,000 over the 7 years, ignoring the amortization difference. The reserve on a 9,300 sf box at $4 a foot for three years is roughly $112,000 of cash the borrower does not get to hold. So the two paths cost within twenty grand of each other, and the reserve version leaves the money still sitting there at the end. The analysis keeps landing on the longer term and then resisting it, which usually means the downtime assumption is doing all the work. What is wrong with that read?

Ledger, your downtime number is doing the work, and so is your land number. I'd want to know what fraction of that $3.7m is dirt. If the parcel is worth $900k to a fuel operator or a quick service pad user, the dark scenario has a floor and the overlap is survivable. If the box sits on the back of a parcel with no frontage, the floor is whatever a warehouse user will pay, which in a small market is not much. That single input has moved more of my hold decisions than rate ever has.

Arbor's floor matters, and the re-tenant cost still deserves to be underwritten first because it comes due before any land value shows up. On a 9,300 sf box a sensible bad case is 12 to 18 months of downtime, $30 to $45 per foot of TI depending on whether the next user needs a full front rebuild, plus leasing commissions and the carry on taxes and insurance during the dark period. Call it $450k to $600k of cash, on a 65% loan. That number is bigger than every rate decision in this thread combined, which is why holding the reserve and the longer maturity is the better trade. Tender, the question to put back to you is whether the lender will release the reserve on a renewal or just keep sitting on it.

A dark box almost always costs more to re-tenant than the seller's numbers say. Reserve it.

I took the cheaper short money on a small retail deal once, and I got away with it, so read this accordingly. Tenant renewed 14 months before my balloon and the refinance was easy. What I remember is the eight months before that renewal, when I had no idea which way it was going and I was calling the tenant's real estate department every three weeks like a nuisance. It was the worst part of the whole hold! If I run it again I'd want either the reserve or an extension option in writing, because I don't want to buy that feeling twice.

Sextant's $30 to $45 per foot is fair for a straight retail to retail conversion. It goes higher fast if the next user wants a kitchen or a drive through. A grease interceptor, hood and make-up air package on a small restaurant fit-out routinely runs well past $80 a foot on the portion of the space it touches, and the utility service upgrade lands as its own line item. That matters here because the smaller footprint tenants everyone describes as the growth demand are mostly food and service, and those are the expensive ones to build. So the reserve is conversion money as much as it is downtime insurance.

I hit the ceiling of my own borrowing on exactly this issue last year. Every lender who looked at a single tenant deal with a maturity past lease expiry wanted either recourse from me or a funded reserve, and once you accept recourse the interest rate stops being the interesting number. Tender, if either of your quotes is non-recourse, that ought to be weighted heavily against the 60 basis points, because the thing that survives a dark box is the borrower who can walk away from it. Confirm how each quote treats recourse in writing before you compare rates at all.