Lender just called the note early and the operator wants to refi but the numbers don't work at today's rates

Question

Lent $210,000 at 7.2% two years ago on a 3/2 in Huntsville, Alabama. The note had a call provision and the borrower got the call letter last week. He's trying to refi out of it but the best he's found locally is 8.9% on a 25-year am, and at that payment the DSCR comes in at 1.04 against his current rent of $1,580. No lender he's talked to will touch it below 1.20. So he's stuck and I'm stuck with him. The house appraised at $248,000 in March, so there's equity, but equity doesn't fix a cash flow problem for a lender underwriting to coverage. He's asked me to extend at the same rate for another 18 months, no call provision, and I'm trying to figure out what I'm actually holding if I say yes. The note performs now. He's never been late. But I didn't build this for an 18-month extension with no exit ramp on my end. The original plan was to get repaid, park it somewhere else, and the whole thesis was a 24-month hold. I'm 26 months in now and the clock already slipped. If rates come down enough for him to refi by month 44, fine, but I'm pricing a scenario where they don't.

cody_ahn · Answer

The part people skip is what "performs now" actually means in month 43 when you've eaten the extension and rates haven't moved. At 8.9% on $210k over 25 years his P&I is roughly $1,740 a month, so at $1,580 rent he's already underwater on coverage without touching taxes and insurance, meaning that 1.04 DSCR his lender quoted is presumably on gross rent, not net, which makes the real number uglier. Huntsville rent growth has been soft in the $1,500 range since mid-2023, a lot of the Madison County inventory that came online stretched that ceiling. If you extend flat at 7.2% you're not just giving up optionality, you're subsidizing his carry while he waits for a macro event neither of you controls. The equity cushion at $248k is real but thin enough that a 6 to 8 percent haircut on a distressed sale eats most of your protection if he can't perform in month 38.

marta_kaminska · Answer

Performed for 26 months means nothing if he can't exit and you're forced to foreclose on a $248k house in Huntsville.

Lender just called the note early and the operator wants to refi but the numbers don't work at today's rates

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