Commercial Investment Real Estate November/December 2017 | Page 19

Reckoning on Libor Bridge loans are offered at a floating rate. They almost always use the London Interbank Offered Rate to calculate the interest due. Unlike fixed-rate loans, the interest rate will change periodically. U.K. regulators have proposed phasing out Libor by the end of 2021. Bridge lenders should examine their existing loans and see which deals will be affected by its elimination. Any changes to a borrower’s interest rate index will be closely scrutinized. Understanding Prepayments Next, bridge loans often feature prepayment very early — in some cases within the first year — and are often interest-only. As a result, commercial real estate professionals should consider pricing carefully. These loans may not produce the income that longer-term loans may provide. Without assumption fees, asset management fees, defeasance fees, and other assorted lender fees, the mort- gage servicers’ income may be simply a servicing fee and interest income on deposits similar to a float. Reserves and Disbursements Bridge loans often provide options for reserves and disburse- ments. Their proper administration may be more critical than long-term loans because of their transitional nature. Mortgage servicers are required to process disbursements, while understanding the requirements for disbursement and what, if any, performance hurdles are required to disburse. Given the need for capital infusions for bridge loan properties, the speed and accuracy of the process determines its success. Extension Options Many bridge loans contain extension options. As a result, com- mercial real estate professionals must ensure that the collateral and the obligors are meeting the performance criteria under the related loan documents. Inevitably, this will involve debt-service coverage ratio maintenance and also may require certain principal curtailments. Commercial real estate professionals should review extension provisions and know these provisions requirements. Bridge lending’s rise will present new challenges for commer- cial real estate professionals. With diligence and preparation, they can use bridge loans effectively and take advantage of these opportunities. Geoffrey R. Maibohm serves as corporate and finance attorney and Robert J. Sullivan is a partner in the Finance Group at Alston & Bird in Charlotte, N.C. Contact Maibohm at [email protected] and Sullivan at robert.sullivan@ alston.com. CCIM Development Specialty Track The CCIM Development Specialty Track program is one of the industry’s leading continuing education concentrations, providing commercial real estate developers, investors, and consultants with a comprehensive understanding of the entire process of development from due diligence to disposition. The program content is structured around the Real Estate Development Matrix developed by Daniel Kohlhepp, Ph.D., of the world-renowned Johns Hopkins Carey Business School. Next Classroom Courses: Introduction to Development Workshop Date: December 4-6 Location: Los Angeles Date: December 12-14 Location: Orlando, Fla. Tuition: Member: $985 REALTOR®: $1,135 Non-member: $1,285 Course Formats: Classroom and Online Instructor-Led To learn more visit www.ccim.com/dev-track or call [phone], opt 2 CCIM.COM November | December 2017 17