What are "Earn Outs" as they relate to commercial property loans and commercial bridge loans?
An earn out is an agreement by the lender to increase the loan amount at the advent of a certain event. Earn outs are structured such that the additional money can be handled by the operating performance of the property. For example, more money can be released in the form of an earn out if the property has gone through renovations, has upgraded its tenant’s minimum income criteria or increased its tenant occupancy. Resizing criteria for the earn out loan to be triggered could be expressed or measured in forms such as a minimum debt service coverage ratio (DSCR) or as a minimum loan to value ratio (LTV).
An earn out is NOT a new loan or a refinancing of an existing loan; it is simply an increase of an existing loan. That means that new funding is availed without the costs associated with new commercial property loans such as attorney fees, closing fees, etc.