Short term facilities almost never fail because the asset was wrong. They fail at the end, when the money that was going to repay them arrives late, arrives smaller, or does not arrive. Everything difficult about transitional finance is concentrated in the last sixty days, and almost everything that determines how those sixty days go was decided before drawdown.
An exit is a thing a third party can verify
There are three real exits: a sale, a refinancing, or an identified injection of liquidity from elsewhere. Each is credible only when it can be tested by someone who does not share the borrower’s optimism.
A sale is evidenced by comparable transactions at the assumed price, by an agent’s written view of the timetable in that specific market, and where possible by an offer already in hand. A refinancing is evidenced by an indication from a named institution, or at minimum by a defensible account of the metrics the asset will present when the facility matures: income, occupancy, condition, licences complete. Liquidity from elsewhere is evidenced by the transaction that will produce it, with its own timetable and its own risks disclosed.
What none of them is: a sentence. “We will refinance with a bank” is not an exit, and a lender that accepts it as one is either mispricing the risk or intending to make its return from the extension rather than from the loan.
Build the timetable backwards, then add the gap
Take the maturity date and work back. A bank refinancing requires a credit process, a valuation, legal work and notarial completion, and in Spain the registration that follows. Three months is quick. A sale requires a buyer, a deposit, the buyer’s own financing, and completion. Anything involving a new build additionally requires the first occupation licence and the registration of the new construction before units can be delivered.
The gap between practical completion and money in the account is the single most underestimated period in real estate finance. Two to three months is routine. A facility whose term ends the week the building is finished is a facility that will need extending, and the price of an extension negotiated under pressure is not the price of one negotiated at the outset. Our note on development and construction finance in Spain deals with that sequence in detail.
Set the maturity for the day the money actually arrives, not the day the work is done. The distance between those two dates is where short term lending goes wrong.
Negotiate the extension before you need it
The extension clause is worth more attention than the interest rate. Three questions decide it. Is extension a right the borrower can exercise, or a request the lender may refuse. What does it cost, expressed as a fee and a rate, agreed now rather than determined later. And what conditions attach to it, since an extension conditional on a valuation that has to be at least a certain figure is not an extension, it is an option the lender holds.
A borrower who secures a contractual right to extend for a stated period at a stated price has bought insurance against the most likely thing that will go wrong. It usually costs a fee at the outset. It is almost always worth it.
Refinancing means presenting a different asset
The point of a bridge is that the asset changes during the term: it gets built, let, licensed, repaired, or freed of a problem. The refinancing bank is looking at the asset at the end, not the one at the start, and the file has to be assembled for that audience.
That means keeping, from day one, the documents the next lender will want: certified progress, licences, the building book, tenancy agreements with their dates and indexation, service charge accounts, and a clean registry position with the works registered. Borrowers who assemble this at the end discover that documents which were easy to obtain at the time are difficult to obtain a year later. The requirements are set out in our note on what a lender needs before opening your file, and they apply to the exit as much as to the entry.
What to do when the exit slips
Tell the lender early. This is counterintuitive and it is the single most valuable behaviour available to a borrower. A lender informed sixty days ahead has options: extension, partial repayment, a revised timetable. A lender informed the week before maturity has one option, and it is the expensive one.
Bring a proposal rather than a problem: what has slipped, by how long, why, what is being done, and what is offered. Partial repayment from another source, additional security, a fee, an increased rate for the extended period. Lenders in this market are commercial and they price certainty. What they cannot price is a borrower who has gone quiet.
And if the exit has failed rather than slipped, say so and address it, because the options available while there is still equity in the asset are entirely different from the options available once there is not. Our note on when transitional finance makes sense sets out the point at which this structure stops being appropriate.
Montclare structures and arranges financing secured on European assets, and prepares the corporate and tax structure that sits behind it. Our services are set out on our services page.
This article is informational and does not constitute tax, legal or financial advice. Lending and credit intermediation are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.