Fine-tuning a Loan Agreement
Loan: $40,000,000
Client: West Coast developer
Property: Office/mixed-use
Location: California
Budget: 6% LIBOR
Benefit to Borrower: $358,000 Over 1 year
Borrower Situation
CIRM’s ideal, often honored more in the breach than the observance, is to help our clients during negotiations with prospective lenders. In this recent case, we exploit that rare opportunity to the fullest – to our client’s financial advantage:
For this loan, the lender requires the borrower to purchase an interest-rate cap of 5% LIBOR running to the loan’s initial maturity in three years. The client is inclined to accept. After all, 5% seems like a reasonable cost of doing business... and it’s below budget.
One other fact, little noticed by the client: The yield curve is flat.
CIRM Solution
Our detailed analysis presented during negotiations persuades the lending bank to:
- Expand the range of permitted options beyond 3-month LIBOR. This leeway allows us to make a variety of LIBOR fixes until the yield curve returns to normal.
- Eliminate rounding which, like “house odds,” works against the borrower, and
- Raise the cap from 5% to 6%.
Result
- Relative to a one-year fix, implied saving on interest carry exceeds $100,000.
- Eliminating LIBOR rounding saves another $22,000 per year.
- Finally, the higher cap lowers the premium by 59 basis points. On the $40,000,000 loan, the savings amounts to $236,000.
All payments averted – $358,000 – drop straight to the bottom line.
