CRE Financing Due Diligence

Loan Term

• Does your exit strategy align with your loan maturity?

  If your typical hold period is shorter than the loan term, you may face term premiums when exiting early. Structure terms that match your projected timelines.

Prepayment Penalties

• How do prepayment penalties affect your all-in borrowing cost?

  A penalty that effectively raises your rate from 4% to 6% significantly changes the loan economics. Always include this in your cost analysis.

Fixed or Floating Rates

• Are you prepared for interest rate fluctuations?

  Evaluate the trade-offs between fixed and floating rates by asking:

  • Are rate forecasts realistic for the next 5–10 years?
  • How would unexpected hikes or drops impact your strategy?
  • Does the loan offer flexibility, like partial releases or accelerated repayment, to hedge against uncertainty?

Restrictive Covenants

• Are the covenants aligned with your operational goals?

  Key considerations include:

  • Debt Service Coverage Ratios (DSCR): Could a short-term cash flow drop trigger a covenant breach?
  • Minimum Occupancy Requirements: Does the covenant require a specific occupancy level to avoid default? If so, how does this align with your lease-up strategy or repositioning timeline?
  • Property Use and Leasing Restrictions: Are there limitations that could hinder your ability to maximize revenue?
  • Cash Flow Sweeps: Will these provisions impact liquidity for property management or reinvestment?

Recourse or Non-Recourse Loans

• What level of liability are you comfortable with?
  • Recourse Loans: Provide lower rates but expose your personal or corporate assets in the event of default.
  • Non-Recourse Loans: Limit liability to the collateral but often come with higher interest rates and more restrictive covenants.

    Carefully evaluate if the added risk of recourse is justified by the potential savings or strategic advantages.

Interest Rate Shocks and Hedging

• Is your financing strategy resilient?

  Rate volatility can have an outsized impact on returns. Have you accounted for potential shocks, and does your strategy include cost-effective hedging options?

Commercial real estate financing isn’t just about securing capital—it’s about finding the right structure to support your investment goals while minimizing risk. A thoughtful approach to terms like recourse, covenants, and rate risk ensures your capital strategy becomes a competitive advantage.

Align financing with strategy. Every loan decision should reflect a balance between cost, flexibility, and your investment goals. A disciplined approach to due diligence helps avoid surprises and positions you for success.