A takeout loan is simply a loan that pays off a construction loan.
Let’s say, for example, that you own a real estate development company that purchased a piece of land with the intent of building on it. In order to finance the construction, you get a short-term loan from the bank, due to be paid in full, when construction is completed. Interest on this loan is high, since the building isn’t completed, and you can’t prove that it is a viable investment with potential for profit.
Once the project nears completion, you approach a different bank, let’s call it Bank 2, in order to acquire a long-term loan with better interest rates. You then use that loan to pay off the loan from the first bank.
TYPES OF COMMERCIAL PROPERTIES THAT CAN USE TAKEOUT LOAN
- Office buildings,
- medical offices and
- retail offices
… are just some of the properties that can benefit from a takeout loan.
Hotels and apartments can also be developed and built with a specific type of takeout loan.
As a long-term loan, it has amortizing fixed payments, or payments where the principal is paid off over a period of time according to a fixed payment schedule. There, are however, some lenders who have been amenable to zero-coupon mortgages, however.
Because takeout loans are NOT high risk, commercial banks are more willing to LEND developers and builders in order to ENCOURAGE commercial property construction and renovation.
TAKEOUT LOANS ARE NOT THE SAME AS FORWARD COMMITMENT LOANS
Takeout loans are long-term loans that are used to pay off a bridge loan. Forward commitment loans, on the other hand, are less of a loan, and more of a fancy (but very expensive) promise to provide a takeout loan if all the specified conditions are met.
Unfortunately, most forward takeout commitments will cost you one or two points. Not exactly what most developers and investors want. One big caveat about takeout loans – and why they’re easier to get.
Why Hesitate To Apply For Takeout Loan?
There’s one big difference, however, about takeout loans that might make you hesitate to apply for one: lenders of takeout loans expect to receive a cut of the income produced by the property, as well as a portion of the capital gains once it’s sold. While some investors are leery of signing away a portion of their profits, others feel the terms are no different than obtaining financing from a private lender.
What do you think? Have you ever obtained a takeout loan? Were you happy with the terms you were offered? Join the discussion over at Google+.