A.CRE

Good News Money

Additional funds paid out to the borrower by a mortgage lender upon the occurrence of certain “good news” events, such as the owner concluding a lease agreement with a major tenant in the building or reaching some pre-determined net operating income. Such additional funds are added to the outstanding loan balance and are generally subject to the same terms as the underlying loan.

Putting ‘Good News Money’ in Context

Background

Summit Equity Partners, a real estate private equity firm specializing in value-add investments, recently acquired Green Valley Plaza, a 120,000-square-foot grocery-anchored retail center in Cheyenne, Wyoming. The property was purchased for $18 million with a business plan focused on leasing up 20,000 square feet of vacant in-line retail space and re-tenanting a portion of the center.

The Loan Structure

To finance the acquisition and planned improvements, Summit secured a $14 million bridge loan from a regional mortgage lender. The loan included a Good News Money provision, allowing the firm to draw an additional $1.5 million if certain leasing milestones were met. These milestones included securing a lease with a credit-rated tenant for at least 10,000 square feet and achieving a stabilized Net Operating Income (NOI) of $1.6 million annually.

The Good News Money would be added to the existing loan balance and would carry the same 6.25% interest rate and terms as the original loan.

The Good News Event

Six months after closing, Summit successfully signed a 12-year lease with a regional fitness chain to occupy 15,000 square feet of the previously vacant space. The lease generated an additional $300,000 in annual NOI, bringing the total property NOI to $1.7 million, surpassing the threshold set by the lender. This qualified Summit for the Good News Money disbursement.

Financial Impact

With the disbursement of $1.5 million in Good News Money:

  • The outstanding loan balance increased from $14 million to $15.5 million.
  • The property’s value was reappraised at $22 million, reflecting the stabilized NOI and enhanced tenancy.
  • The additional funds were used to renovate common areas and modernize storefronts, further positioning the center for long-term success.

Calculation of Loan Impacts

The loan terms required interest-only payments for the first two years. At 6.25%, the annual interest payment increased as follows after the Good News Money disbursement:

  • Before Good News Money: Interest Payment = $14,000,000 × 6.25% = $875,000 annually
  • After Good News Money: Interest Payment = $15,500,000 × 6.25% = $968,750 annually

Thus, the Good News Money added $93,750 in annual interest costs but also facilitated property improvements that were expected to drive higher rents and occupancy rates over time.

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