a lender's binding agreement to provide permanent financing when a construction or project financing has expired. Take-out commitment is usually done after meeting certain conditions.
Take-Out Commitment Details
A take-out commitment is a guarantee or an agreement that you as a lender write to provide permanent financing to replace a short-term loan at a specified date in the future, especially if the project you are about to execute has reached a certain stage. A lender is an individual, group, or financial institution whose responsibility is to provide funds for a business. A way to describe permanent financing is as a long-term loan used to build or maintain fixed assets.
Farlex's financial dictionary defines take-out commitment as "an agreement by a financial institution or an investor to make a long-term loan at a certain, stated date in the future." According to the dictionary, a take-out commitment "may be made in construction or other projects when short-term financing is initially beneficial, but the borrower anticipates long-term financing to become more advantageous at a later time."
In take-out commitment, a specific and final amount is loaned out for the project in case contingencies are unmet. Contingencies are contract provisions that ensure a definite action should have taken place for a valid contract. The contingency attempts to protect both the permanent lender and the original short-term lender when unforeseen circumstances arise down the road. Take-out commitment helps you stabilize your financing by replacing a higher-interest short-term loan with a lower-interest long-term loan.
Example of Take-Out Commitment
Smart is a developer who wants to build a multi-tenant industrial building without pre-leasing. He foresees that rents will go through the roof because manufacturing in the city where he resides was poised to go nuts. His challenge was to capture the ballistic demand for newer industrial spaces in his city.
Smart proceeded to the bank to see his construction lender. The construction lender told Smart the only way he can get his loan approved is by getting a take-out commitment from a bankable lender. This lender might be a commercial real estate lending company with a net worth large enough to stand behind its promise to fund a loan in the future.
Smart tracks out several companies and then submitted his take-out commitment request. After many failed attempts, he eventually got a bankable lender issuing standby take-out commitments. The bankable lender agreed, but his terms were a bit outrageous to every other person but Smart. He then informed his construction lender, who informs him that the take-out commitment will work. He got the construction loan funds, and the industrial building gets built.
Take-Out Commitment and Take out Loan
Take-out commitment and take-out loan are terms frequently used interchangeably, but, in reality, these terms are significantly different. While a take-out loan is something you take from a financial institution or a credit issuer to pay off debts from the past or some other outstanding balances you have with other creditors, a take-out commitment is a written document from a financial institution. This written document serves as a guarantee for the provision of permanent financing upon completing the project you want to execute. It is a letter that promises to deliver a take-out loan in the future.
A take-out commitment usually contains:
- The design and materials approval,
- The date the project is to be completed,
- The minimum occupancy rate before funds are released, and
Enough provision for extending the start date of the loan peradventure there are any unforeseen delays. One of the key things you should consider as a lender or developer is gap financing in take-out commitment. Gap financing is a short-term loan procured to meet immediate financial obligations before obtaining sufficient funds to finance the long-term financial need. It involves the efforts you have put in place as a construction lender or developer to ensure that the permanent lender does not hold back funds due to contingencies.