Unlike many commercial loan programs, CMBS conduit loans can provide for partial interest-only loan payments as well as full-term, interest-only loan payments for lower leverage loans. This structure provides for higher cash flow after debt service to the sponsor, and it can be particularly useful in situations when rents are expected to increase in the future, which would allow for amortization payments that would be difficult now.
We recently had a situation in which a sponsor agreed to expand at its own expense a ShopRite food store to 50,000 square feet from 40,000. In consideration, ShopRite executed a 15-year lease extension. However, ShopRite only agreed to a significant rent increase reflecting the landlord’s investment in the expansion after 24 months. This put the sponsor in a bit of a dilemma as his existing loan was maturing and he wanted to get credit for the ShopRite lease through additional loan proceeds, but this diminished cash flow after debt service until the higher ShopRite lease payments kicked in.
The solution was to provide a 24-month interest-only period at the beginning of the new loan. After 24 months, the loan would pay based on a 30-year amortization schedule. The increased rent from ShopRite is more than the amortization portion of the loan, so cash flow after debt service will actually increase despite the amortization payments that will begin in month 25.
“Some people complain that CMBS conduit loans are inflexible, but here is an example where conduit loans can be structured to solve a problem,” commented Michael D. Sneden, Executive Vice President at ValueXpress.