take-out loan

Are take-out loans arranged prior to the time when the short-term loan is obtained? If not, it seems like an awfully risky arrangement.

Take-out loans are not always arranged prior to the closing of a short-term real-estate loan. If a take-out loan is not in place, the lender can mitigate the risks by structuring the terms of the short-term loan to ensure that it can be refinanced via a permanent financing source and by requiring varying levels of up-front equity to insulate the lender from potential declines in value. The lender will also ensure that pro forma rental rates and occupancy levels are acceptable and that the project could support debt payments at stabilization should a refinance not be obtained

Equally important to a lender in mitigating refinance risk is a client's history. Lenders evaluate the past performance of the client in delivering previous projects and successfully repaying the related loan. Some lenders may also look to the personal (or corporate) financial strength of the individual borrower/owner to determine what level of financial support they offer to bridge the gap between the loan and any potential refinance shortfall.

Brooke Barber, Vice President, Middle Market Banking, Atlanta, GA