Minimum Multiple Requirements in CRE Loans

Lenders often structure their loans to ensure that they earn a minimum return.  This is where the minimum multiple comes in – which guarantees the lender earns a certain total return on their invested capital even if the deal is paid off early or generates low interest.

Example: 

ABC Corp secured a $10,000,000 bridge loan with a 1-year term, 14% interest rate, interest-only, and a minimum multiple of 1.14x.  This means that for this loan the lender must receive at least $1,400,000 in total interest.  In other words, for every $100 lent, the lender must earn at least $114 back.

See the loan schedule below, in this example the loan is paid off early in Month 9.  The monthly interest payments are $116,667 ($10,000,000 x 14%/12).  The sum of these interest payments for nine months is $1,050,000.  This is lower than the required minimum interest amount of $1,400,000.  So, the borrower would owe $350,000 to the lender to hit their minimum return requirement – ensuring that they receive at least a 1.14x multiple on invested capital (MOIC). 

This ties back to one of the first questions to ask when securing financing, “what is the exit plan?”  If the borrower intends to refinance or sell the property before the loan matures, knowing what the cost is to do that is essential as it can directly affect investment returns.