What an interest rate cap is doing on a bridge loan

Bridge loans are often floating. The payment changes when the index changes. A lender that does not want the payment to rise without a ceiling will ask for an interest rate cap. The confirmation, whatever form the provider uses, is where you should be able to find four things: the strike, which is the index level where payments under the cap begin; the term, which is how long that protection lasts; the notional, which is the principal amount the cap is calculated on; and the counterparty, which is who is obliged to pay. If any of those is missing, you do not yet have a cap you can describe to a credit committee. This note does not say every bridge lender requires a cap. Read the term sheet in front of you.

Nothing here is a price. Cap premiums move with the strike, the term, the notional, and the day you buy. A strike that was cheap last quarter is not a benchmark. A lender's minimum counterparty standard, if it has one, belongs in that lender's checklist, not in a universal rating this page invents. The permanent-loan cousin of this subject, which is about locking a fixed or floating coupon rather than buying a cap, is fixed versus floating rate locks. Read that page for the lock. Stay here for the cap.

Extensions are where caps get forgotten

A one-year cap on a loan that can be extended for another year does not cover the extension unless someone buys more protection. Term sheets handle that in different ways. Some require a new cap as a condition of the extension. Some require a reserve or an escrow so the premium can be paid when the extension is requested. Some are silent, which means the question is still open and should be asked before you sign. Extension versus refinance is the broader choice between staying with the current lender and replacing the loan. The cap is one line in that choice, not the whole choice.

Match the notional to the principal the lender is actually protecting. A cap sized to a smaller number than the loan balance does not cap the whole payment. Match the index in the confirmation to the index in the note. A cap on the wrong index is a different bet. None of those matches is a legal opinion. Counsel and the lender's counsel read the documents. We arrange the loan and we tell you to look.

Where this shows up in Phoenix apartments

A Phoenix apartment bridge of five or more units is the city page that sends sponsors here: Phoenix multifamily bridge. Statewide bridge, which is not only apartments, is Arizona bridge. If the business plan is a permanent agency loan, the cap is a bridge-period document. It is not the agency coupon. Capital Market Funds is not a Fannie Mae DUS lender, and it does not sell the cap. The cap provider is a third party the lender will accept.

The office is 7373 E Doubletree Ranch Rd #255, Scottsdale, AZ 85258. The phone is (480) 495-8072. Capital Market Funds, LLC - CBK-2007014 - Commercial Mortgage Banker and NMLS 1445066. Do not send this office a request for a strike price. Send the term sheet and, if you have it, the confirmation.