ValueXpress recently originated two CMBS loans on unstabilized properties in which the sponsors would not have received adequate loan proceeds based on the property’s limited historical operating statements. Working with a long-time CMBS lending partner with an aggressive entrepreneurial focus (yes, some of the CMBS shops are very creative), the transactions were structured with earnouts, whereby the entire amount of desired proceeds were rate-locked and funded at closing, but a portion of the funds above a pre-determined Debt Yield were placed in escrow. The sponsor, over a pre-determined period (6 months on one deal and 12 months on the second deal), submitted updated trailing 12-month cash flow statements monthly that would include a current, high performing month of cash flow and drop off a worse performing month from the prior year; the result was higher underwritten Net Cash Flow and higher loan proceeds at the pre-determined Debt Yield. After a number of months, the Net Cash Flow reached levels such that the entire earnout was released to the borrower as the Net Cash Flow on a trailing 12-month basis supported the entire loan amount, including the earnout at the predetermined Debt Yield.
“These transactions would have never closed in the absence of the earnout structure,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “In the end, one deal hit its Debt Yield target in three months and the second transaction is expected to hit its target in six.”