Need to Refinance With a Reluctant Lender? Try an Equity Kicker

Let’s say you have an office loan that is set to mature. Your timing couldn’t be any worse, right/? Right. In this current environment, especially after the events of this week with First Republic, lenders are more loath than ever to extend or give an additional term to most office loans. And let’s not even discuss trying to find a new lender relationship with an alternative source, such as a life company. 

But there is an option, one that the market hasn’t seen in a while thanks to the decades of ultra low interest rates.

It’s called an equity kicker, a strategy in which a lender converts a portion of the loan to equity so the debt can be re-serviced. In other words, a lender agrees to extend a loan provided it can share in the upside if the property eventually sells for more than the loan is worth.

A lender is unlikely to agree to an equity kicker if the situation is hopeless, Scott Vetri, a partner in the real estate department of Katten law firm, tells GlobeSt.com. “In that case it might decide to take a loss right now.” But there are plenty of scenarios where a lender would be willing to consider an equity kicker, Vetri and his colleague, partner Tim Little say.

One ideal scenario is a property where its value is above the current loan and there is a positive cash flow that can cover the debt service. Granted, as valuations drop and the cost of debt continues to rise, such scenarios are dwindling in numbers.

But Vetri and Little say that lenders are eager to negotiate with borrowers to keep bad loans off of their books. “We are seeing some dancing going on where the borrower offers the keys back and the lender says ‘isn’t there something else we can do,’” Little says.

Most equity kickers are bespoke situations but Little and Vetri say that they typically hover around 50% but don’t go over that. “There are tax implications for the lender if you go above 50%,” Vetri says.