The other day on LinkedIn, a big commercial construction lender posted a tombstone announcing the closing of a whopping $60 million revolver. Revolver? What on Earth is a revolver?
A revolver is revolving line of credit that allows the borrower to borrow some dough, pay interest on it a for a few months, pay it off, allow the line of credit to rest for six weeks, borrow some more money, pay half of it back, paying interest on the outstanding balance monthly, and then pay off the remaining balance in full.
A revolver has other names - a revolving credit facility, an operating line, or a bank line.
What separates revolving debt from regular installment loans? In a regular loan, the borrower is given immediate access to a fixed sum of money, that must then be amortized and paid off over the loan term.
For example, a borrower might have been lent $100,000 by a bank to start a business. The term of the loan is two years, and the borrower is required to pay the $100,000 plus interest back over this period.
In revolver debt, the borrower is instead given a line of credit with a maximum limit. The borrower can access any amount up to this limit at any time and does not have a specific term within which to pay the loan back; however, interest will accrue on any outstanding funds borrowed.
In revolver debt, the borrower can re-access any funds that have been paid back. In installment loans, once the loan has been repaid, the borrower must reapply for a second loan if he or she wishes to borrow more.
In revolver debt, there may not be a fixed payment value or term. In installment loans, the interest and principal payments are fixed.
Revolver debt will usually come with higher interest rates than installment loans, due to the greater uncertainty regarding repayment.
To commence the revolving credit facility, a bank may charge a commitment fee. It compensates the lender for keeping open access to a potential loan, where interest payments are only activated when the revolver is drawn on. The actual fee can either be a flat fee or a fixed percentage.
Several years ago, George Smith Partners posted a similar tombstone for a big revolver:
"George Smith Partners placed a structured senior and collateralized line of credit revolver in a cash-out execution for a business in Los Angeles. The first loan was structured to be self-liquidating over 15 years with a fixed rate of 3.90%. The $1,000,000 second trust deed is a true revolver that can be used as a checkbook and has no limitations on uses."
"This particular revolver had no utilization fee. In other words, the borrower does not pay a fee each time that he draws down on his line of credit."
"There was no annual clean-up for funds outstanding over 12 months either. Bank regulators require that unsecured lines of credit to be rested (paid down to zero) for at least thirty days every year."
"In this case, because the revolver was well-secured by commercial real estate, the bank did not require an annual clean-up."
So where do you go to get a revolver on commercial real estate. Commercial banks are the usual issuers of revolving lines of credit.
But folks, revolvers secured by real estate are very rare. They are reserved for commercial real estate loans of least $5 million, and they are only made to VERY high net worth borrowers. Mere mortals need not apply.
He was terrifying in his time.
A great many residential lenders make revolving lines of credit (home equity loans) on owner-occupied homes; so it it natural for lots of commercial loan brokers to ask if their investor clients can get a a line of credit, secured by an apartment building or an office building.
