A.CRE

Takeout Loan

A form of permanent financing utilized to retire existing short-term debt, such as construction loans or bridge loans. Commonly known in the industry as a construction loan takeout or bridge loan takeout, these loans are structured with extended repayment periods and fixed payment schedules typical of permanent mortgage loans.

A takeout loan may serve solely to repay the outstanding balance of the short-term debt, or it might also facilitate a return of some or all of the equity initially invested in the project, akin to a cash-out refinance.

Putting ‘Takeout Loan’ in Context

Lone Star Residential Developers recently completed phase one of “The Oaks BTR Community” in Austin, Texas. This build-to-rent development, consisting of 120 single-family homes and duplexes all designed for long-term rental, was initially financed through a short-term construction loan.

Upon the completion of construction and achieving 90% occupancy (i.e. stabilization), rather than sell the project (i.e. merchant-build), Lone Star Residential Developers chose to hold the project long-term. This necessitated transitioning from their high-cost, short-term financing to a stable, long-term financing solution. They sought out a takeout loan that not only allowed them to repay the outstanding balance of the construction loan but also included a cash-out refinance component. This component enabled them to return a meaningful portion of the equity that had been invested in the project back to the initial investors, enhancing investor satisfaction and financial returns.

The takeout loan was structured with the following terms:

  • 10-year term, 30-year amortization.
  • 6.25% fixed rate on the takeout loan, which is significantly lower than the SOFR + 400bps floating rate on the construction loan.
  • The extension of the loan term and the implementation of fixed payments provided financial stability and predictability, protecting the project against future interest rate volatility.

This hypothetical scenario demonstrates the utility of takeout loans in real estate development for achieving both refinancing objectives and equity liquidity.

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