How to Read A Real Estate Loan Agreement: Practitioner's Guide Covenants, Cash Traps, Recourse and What Happens When the Test Is Missed

A sponsor buys a building for sixty-two million dollars with a thirty-seven million dollar loan and a model showing 4.21 percent cash-on-cash. Every number is correct, and the sponsor will not receive 4.21 percent.Reserve deposits take 121 basis points before anything is distributed. A debt service reserve of 1,388,830 dollars must be funded at closing out of equity the model treated as invested in the building. The lender's own definition of net operating income turns 1.395 times coverage into 1.210, one percent of income away from a cash trap on the day of closing. None of that is in the term sheet. All of it is in the loan agreement.Who this book is for- Sponsors and acquisitions teams who sign these documents- Fund controllers, asset managers and portfolio managers who live with the covenant tests- Credit officers, originators and loan asset managers on the other side of the table- Debt advisers, committee members and lawyers early in a real estate finance practiceWorked throughout, on one financing- Loan to value binds at 60 percent; coverage would have supported 67.0 percent and debt yield 69.4.- The covenant ladder: cash trapped at a 14.0 percent decline in income, swept at 21.2, in default at 24.7.- A cure by deposit costs 233,192 dollars; the same cure by prepayment costs 2,602,535, and the ratio depends only on the covenant and the amortization.- Prepaying in year three costs between 1,074,929 and 4,821,005 depending on the mechanism.- A springing recourse carve-out turns a loan on which the lender loses nothing at a thirty percent decline in value into a 34,762,591 dollar personal obligation.What the book coversThe three sizing tests; the mortgage constant; hedging and the cap; what the loan costs; the covenant ladder; coverage and why the definition is the covenant; debt yield and loan to value; lockbox, waterfall, trap and sweep; reserves; cure rights; prepayment, yield maintenance and defeasance; the extension option; recourse and the guaranty; transfers, reporting, default, mezzanine and the workout.Tools includedA loan abstract template field by field, forty red flags, three timed practice cases with solutions, the questions worth asking a lender, and a glossary. A companion workbook rebuilds the cure appendix with sixty-one controls; alongside it are a blank version, a one-page model of your own loan, thirteen working documents to print, forty self-marking questions and three further cases. Nothing is locked; download details are inside the book.Part of How to Read the Deal Documents. Read next: How to Read a Commercial Lease, The Real Estate Debt Investor.No sample clause language and no jurisdiction's law. Not legal advice; it will make you a better client of the people who give it.