Commercial Loans and Fun Blog

When Lenders Re-Trade a Commercial Loan

Posted by George Blackburne on Fri, Dec 4, 2020

Re-tradeLast week, in their latest FinFacts newsletter, George Smith Partners released the following tombstone:

"George Smith Partners successfully placed $14,050,000 in construction financing, which funded 89% of total project cost, for the acquisition and reposition of a 79-unit, mixed-use property in a desirable and historic St. Louis City neighborhood.  GSP was engaged by the Borrower when its original lender, a national REIT, was forced to re-trade the Borrower on loan terms due to the COVID-19 pandemic."


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What does it mean to "re-trade the Borrower on loan terms"?

According to Wikipedia, a re-trade is the practice of renegotiating the purchase price of real property by the buyer, after initially agreeing to purchase at a higher price.  Typically this occurs after the buyer gets the property under contract and during the period that it is performing due diligence.  The buyer may raise a due diligence issue and demand a purchase price adjustment to a lower re-trade price.

In a context of commercial real estate finance, to re-trade the borrower means to alter the loan terms negatively, usually due to some serious economic event, such as the Great Recession or the COVID Crisis.


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Many conduit loan borrowers, when the Great Recession hit in mid-2008, were caught with their loans still in process.  The conduit lenders went back to their borrowers and told them, "Look, the market for commercial mortgage-backed securities is collapsing.  We can't sell your loan at our originally proposed interest rate.  We are going to have to raise your interest rate by almost 1% and cut you loan-to-value ratio back from 75% to just 62%."  More of these conduit borrowers chose to walk.

The re-trade of the big construction loan that George Smith Partners described above was probably a big cut in the loan-to-cost ratio.  You will recall that the Total Cost of a construction project is the sum of the land cost, the hard costs, the soft costs, and a contingency reserve of around 5% of hard and soft costs.

The Loan-to-Cost Ratio is therefore just the Construction Loan divided by the Total Cost, multiplied by 100%.  The most typical loan-to-cost ratio on construction loans is 80%.


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Let's now go back to the big construction loan that George Smith Partners just closed.  Perhaps the REIT initially proposed a construction loan of 80% of cost; but after COVID became a pandemic, this REIT probably cut heir loan-to-cost ratio down to only 70%.  

The developer probably didn't have an extra $1.6 million in equity to contribute to the project.  Fortunately, the good folks at George Smith Partners saved the day.

Can lenders really re-trade a borrower legally?  You will recall that in commercial real estate finance ("CREF"), lenders almost never issue a firm commitment.  They merely issue a term sheet - also known as a loan proposal or conditional commitment letter.


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A term sheet is not a firm commitment.  It is just a letter expressing an interest in making a commercial loan and providing a good faith estimate of the eventual terms.

Although the typical term sheet is not binding on a commercial lender, it is the custom and practice in the industry for the lender to honor a term sheet, absent a major change in the bond and/or real estate markets.  

In real life, the vast majority commercial lenders are pretty good at sticking to the terms of a term sheet.

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Topics: Re-trade of a commercial loan