Can the lender close? Questions to ask before signing

What execution risk means

Execution risk is the probability that the loan does not close on the terms in the signed term sheet, on the timeline in the signed term sheet, or at all. It comes in three flavors: retrade (the lender changes terms during diligence), delay (the closing timeline slips materially), and walk (the lender withdraws the commitment).

Each costs the borrower differently. Retrade costs basis points across the loan term (often $100K+ on a $20M loan over five years). Delay costs the deposit float plus opportunity cost of the deal pipeline. Walk costs the deposit (if non-refundable), the third-party report sunk cost, and the time to re-launch a bake-off, typically 30 to 60 days.

What causes a lender retrade

Underwriting miss: the appraisal comes in low, the PCA flags major deferred maintenance, the operating numbers in diligence don't match the package. The cure is a tighter underwriting at the package stage and proactive disclosure of any known issues.

Market move: rates spike between term sheet and rate lock, the lender's cost of capital moves or its CRE bucket fills, and the deal becomes uneconomical at the original spread. Bridge debt funds and CMBS conduits are most exposed; agencies and life cos are less so because they fund off match-funded liabilities or balance sheet.

Soft commitment: the LOI's conditions list contains items so vague (subject to credit committee approval, subject to satisfactory diligence, subject to material change) that the lender has functionally retained a free option to walk or retrade.

Internal politics: deal champion changes, credit committee composition changes, lender's CRE strategy pivots away from the property type. The borrower has limited control here; the cure is selecting lenders with stable internal positioning and decision-makers who have signed off on the deal type before.

How to read an LOI's execution risk in five minutes

Conditions list specificity: a strong LOI lists specific conditions (appraisal at or above $X, debt-yield at or above Y%, environmental clean or remediation completed). A weak LOI lists vague conditions (satisfactory diligence, customary conditions, satisfactory to credit committee).

MAC clause language: a tight MAC (specific enumerated events with materiality and likelihood-of-permanent-impairment standards) is a stronger commitment than a broad MAC.

Rate-lock structure: a mandatory rate lock with a defined break fee is a stronger commitment than a best-efforts rate lock that lets the lender walk if conditions change.

Deposit terms: a refundable deposit (with defined refund conditions and a clear timeline) is a stronger commitment than a non-refundable deposit (which often signals the lender is not confident enough to bind themselves).

Closing timeline: a specific calendar date or business-day count is a stronger commitment than as soon as practicable.

Good-faith deposits, refundable conditions and escrow mechanics

Most institutional perm and bridge LOIs require a good-faith deposit at term-sheet acceptance, typically 0.25% to 1.0% of loan amount, sometimes a fixed-dollar minimum. The deposit serves three purposes: lender's commitment that the borrower is serious, advance against expected closing costs (lender legal, third-party report retainers), and downside protection for the lender if the borrower walks.

Refundable conditions to negotiate: deposit returns in full if the lender walks for any reason other than borrower default, deposit returns in full if the appraisal comes in below a defined threshold and the deal is cancelled, deposit applies against closing costs at closing rather than being kept by the lender.

Escrow mechanics: deposit held at a third-party escrow agent (title company is standard) with disbursement conditions in writing, not held by the lender directly. This matters when there is a dispute about whether the lender's withdrawal was justified.

Best-efforts vs. mandatory rate locks

Best-efforts (or rate-and-spread protection): the lender uses commercially reasonable efforts to deliver the quoted rate and spread but is not obligated to do so if market conditions move materially. Standard on smaller deals and during stable markets. The borrower carries the rate risk between LOI and lock.

Mandatory: the lender is obligated to deliver the quoted rate or spread by a defined date, with a defined break fee if either party walks. Mandatory rate locks are typical on larger CMBS and life-co perm; the rate-lock fee is typically 0.10% to 0.25% of loan amount and is often credited at closing.

Extended rate locks: most common on CMBS and HUD where the timeline to closing is long. The cost of an extended lock is paid upfront and represents the lender's hedging cost; in volatile rate environments, the value of locking in early can substantially exceed the lock cost.

Certainty-of-close ranking by capital source

Highest certainty (rarely retrade on signed term sheets): agency multifamily through a top-tier DUS or Optigo lender, life cos with a confirmed allocation, top-tier CMBS conduits with rate-locked deals, banks on relationship deals.

Moderate certainty: regional banks on non-relationship deals, second-tier debt funds, mortgage REITs, smaller life cos. Retrade is uncommon but not unheard of; certainty depends on the specific lender and the specific deal.

Lower certainty: aggressive debt funds quoting headline-leading pricing, debt funds with thin balance sheets, lenders with high concentration in the borrower's property type or geography (concentration limits drive retrade).

Direct-to-borrower lender outreach (vs. a lender introduced through a placement process) can cut both ways, established direct relationships have high certainty; cold lender outreach often produces softer LOIs.

The soft-commitment trap

A soft commitment is an LOI that looks complete but is functionally a free option for the lender. Telltale signs: vague conditions language, broad MAC clause, no specific closing timeline, no defined refundability for the deposit, language to the effect of subject to underwriter and credit committee approval at lender's sole discretion.

The trap: the soft commitment looks like the best LOI on the comparison sheet because it shows the tightest pricing and loosest covenants. The borrower signs, pays the deposit, sinks $30K into third-party reports, and then learns at week six that the lender wants to retrade the rate, the leverage, the recourse, or all three.

Defense: in the bake-off, score every LOI on commitment specificity in addition to economics. The placement firm's job includes flagging the soft commitments before the borrower picks them.

When to re-bid mid-process

Triggers for re-bidding: lender materially retrades a key term, lender misses a material milestone (delivery of loan documents, third-party report completion), lender's contact person changes mid-process and the new contact wants to renegotiate.

The decision to re-bid is timing-driven. If the original timeline allowed 60 days to closing and 20 days have elapsed, there is room for a 30-day rebid against a backup LOI. If only 10 days remain, the right move is usually to accept the retrade and close, then refi at the next opportunity.

Some borrowers prophylactically keep a backup LOI hot, deposit paid with the runner-up lender, third-party reports authorized to the lender's satisfaction, until the winning lender clears credit committee. The cost is one extra deposit and a slower start with the runner-up; the benefit is preserved optionality.

Deposit recovery after a lender walks

If the lender walks, deposit recovery depends on the LOI's refundability language and the reason for the walk. Most LOIs allow the deposit to be retained by the lender if the borrower defaults or fails to satisfy a closing condition; most allow refund if the lender walks for reasons within the lender's control.

In disputed cases, the third-party escrow is what protects the borrower. Funds held by the lender directly are much harder to recover than funds held by a title company or escrow agent.

Practical reality: even with an enforceable refund right, recovering a deposit from a walked lender often requires legal action and time. The placement firm's selection of execution-reliable lenders is preventive insurance against this.

Bank CRE concentration: when a bank pulls back mid-deal

Banks operate under regulatory CRE concentration guidance: total CRE exposure relative to risk-based capital is a key supervisory metric, with elevated regulatory attention triggered above defined thresholds. When a bank's CRE bucket fills (often due to deals booked in prior quarters), new originations slow or stop. The borrower's deal is collateral damage to the bank's portfolio mechanics, not the deal's fundamentals.

Diagnostic signals: a bank that quoted aggressively in Q1 and is suddenly slow to engage in Q3 has often hit concentration limits. The FDIC Quarterly Banking Profile and OCC Risk Perspective publish aggregate CRE concentration data that signals when this is happening market-wide; individual bank Call Report data is publicly available for desk-level analysis.

Defensive positioning: do not rely on a single bank for a critical financing. Bake-off the deal across multiple banks plus at least one non-bank capital source so a bank-specific concentration pull-back does not derail the closing. Repeat sponsors with strong bank relationships sometimes negotiate forward-allocation commitments to mitigate this risk.

If the bank pulls back after term sheet but before closing: the recourse is the term-sheet language. Vague conditions favor the bank's withdrawal; specific conditions and a tight MAC favor the borrower's enforcement of the commitment. The deposit refundability terms govern recovery of borrower-paid amounts.

Agency rate-lock mechanics. Fannie DUS and Freddie Optigo

Both Fannie DUS and Freddie Optigo offer rate-lock mechanics that allow the borrower to lock the loan rate before closing. The lock window is typically 30 to 90 days; longer locks are available at incremental cost. The lock fee is typically 1% of loan amount, paid as a deposit at lock and credited at closing.

Lock break: if the borrower walks after rate lock, the lock fee is forfeited and the lender is made whole on hedge unwind costs. If the lender walks for non-borrower reasons, the lock fee is refunded.

Mandatory vs. best-efforts: agency rate locks are functionally mandatory once executed. The DUS lender or Optigo seller-servicer has hedged the rate in the bond market; the lender must close the loan or unwind the hedge. This makes agency rate locks high-certainty commitments compared to other capital sources.

Practical use: agency rate locks are typically executed when the borrower has high confidence in closing (post-credit-committee approval, all third-party reports clean, all closing documents drafted). Locking too early exposes the borrower to deal-cancellation cost; locking too late exposes the borrower to rate movement.

Life-co best-efforts rate locks: how they work

Most life-co perm loans price at signing as a spread over a defined Treasury (typically the 10-year for 10-year fixed-rate loans) at the time of rate lock. The lock window is typically 30 to 60 days from term-sheet acceptance; the lock fee is typically 0.10% to 0.50% of loan amount.

Best-efforts mechanics: the life co quotes spread plus index, but the index is not locked at term-sheet signing. The borrower carries Treasury rate risk between term sheet and lock; the spread is typically committed by the life co subject to defined market-disruption carve-outs.

Forward locks: some life cos offer forward rate locks at extra cost (typically an additional 25 to 75 bps of rate adjustment for a 6- to 12-month forward lock). Most useful for sponsors with a defined refi window in 6 to 12 months who want rate certainty before the open prepay window arrives on the existing loan.

Diligence to lock timeline: life-co diligence typically completes 30 to 45 days after term-sheet signing; lock typically follows credit committee approval. Sponsors planning around a specific closing date should back-solve the lock date from the closing date, not the other way around.

CMBS rate-lock deposit and the spread-lock window

CMBS rate locks are typically structured as a spread lock plus a Treasury hedge. The CMBS conduit locks the spread at term-sheet acceptance (subject to defined conditions); the borrower elects when to lock the underlying Treasury rate (typically within a 30- to 60-day window).

Lock deposit: typically 2% of loan amount, refundable at closing or in defined refund scenarios. The deposit is held by the CMBS conduit (or sometimes by a third-party escrow agent on borrower-favorable LOIs) and disbursed at closing.

Hedge break costs: if the borrower walks after Treasury lock, the unwind cost on the conduit's Treasury hedge is borne by the borrower out of the deposit. In rising-rate environments, the hedge unwind can produce a refund to the borrower; in declining-rate environments, the unwind can absorb the full deposit.

Spread re-set risk: between term-sheet acceptance and rate lock, CMBS bond market spreads can move materially. Most CMBS LOIs include a market-disruption carve-out that allows the conduit to re-quote spread if bond market conditions move beyond a defined threshold. Borrowers with rate-sensitive deal economics should model this risk explicitly.

Bridge-fund execution, track-record questions to ask

Bridge debt funds vary widely in execution discipline. Aggressive funds quoting headline-leading pricing often have the loosest execution; conservative funds quoting closer to market often have the tightest. The bake-off scoring should reflect this.

Track-record questions: what is the fund's pull-through rate (signed term sheets that close, divided by signed term sheets)? Healthy funds operate at 80%+ pull-through; funds operating below 60% have execution-discipline issues. What was the fund's most recent retrade and why? What is the fund's current allocation status (PACE of new originations relative to capital available)?

Capital structure questions: is the fund operating off a closed-end discretionary fund (most stable), a separately managed account (depends on the SMA's mandate stability), a warehouse line (depends on the warehouse's covenant compliance), or a securitization conduit (depends on the bond market)? Each structure has different sensitivity to market conditions.

Decision-maker questions: who is the deal-team lead, who is the credit-committee chair, what is the credit-committee structure (consensus vs. CIO veto vs. unanimous vote)? Funds with well-defined decision processes execute more reliably than funds where the credit decision is unclear or contested.

Pull-through statistics: what a strong number means

Pull-through (signed LOIs that close, divided by signed LOIs) is the single best statistical indicator of a lender's execution reliability. Top-quartile institutional lenders operate at 90%+ pull-through; bottom-quartile operate below 70%.

Sources of pull-through data: lenders rarely publish their own statistics; placement firms maintain internal databases of signed-LOI-to-closed-loan conversion by lender. Sponsor references on prior closed deals are the borrower-side equivalent. For CMBS conduits, public bond-issuance pipelines provide indirect signals.

Pull-through caveats: a lender's pull-through can be artificially high if they quote conservatively (LOIs are tight, retrade is rare because the LOI was already conservative) or artificially low if they quote aggressively (LOIs are wide, retrade is common because the LOI was over-priced). The right comparison is pull-through within a defined pricing band.

Compare a lender’s approval and funding conditions, relevant transaction history and ability to meet the schedule alongside the economics. Do not assign a numerical closing probability without a reliable basis.

Closing-team capacity as an execution risk

Beyond the lender's commitment quality, the lender's closing-team capacity drives whether the loan closes on the term-sheet timeline. Lenders running understaffed closing teams during high-volume periods (year-end agency rush, post-rate-cut bridge surge) typically slip closing dates by 2 to 6 weeks, even on clean deals.

Diagnostic signals: a lender whose primary contact takes 24+ hours to respond to email during the closing window is likely overloaded; a lender whose closing checklist takes more than 3 business days to deliver after term-sheet signing is likely overloaded. The placement firm's job is to flag these signals before the deal commits to that lender.

Counsel coordination: lender counsel is often a separate execution-risk variable. Outside counsel handling 15+ simultaneous closings will not deliver loan documents within the term-sheet timeline. Some lenders use in-house counsel which is typically faster; others use outside counsel which is typically slower but more institutionalized.

Mitigation: build closing-timeline cushion into the term-sheet date if the lender's closing team is known to be backed up. The cushion costs nothing if the closing happens on time; it preserves the borrower's optionality if the closing slips.

Credit-committee risk: what 'subject to credit approval' means

Most LOIs are issued subject to credit-committee approval. The condition is standard but the underlying credit-committee dynamics vary widely by lender and by deal. Understanding the lender's credit process is the difference between a confident LOI and a lottery ticket.

Pre-screening vs. post-issuance: top-tier institutional lenders pre-screen deals through an underwriter and a senior originator before the LOI is issued; the credit-committee step is largely confirmatory. Other lenders issue LOIs to attract deal flow and only run credit committee after term sheet is signed; the credit-committee step is genuinely uncertain at LOI stage.

Diagnostic question: ask the originator directly whether the deal has been pre-screened with the underwriter, whether it has been discussed with the credit-committee chair, and how confident the originator is on credit approval. Originators that answer specifically and confidently are signaling a high-probability LOI; originators that hedge are signaling uncertainty.

Credit-committee composition: deals that fit the lender's standard underwriting box (property type, leverage, sponsor profile, geography) typically clear credit committee; deals that require committee judgment on a non-standard element have higher credit-committee risk. The placement firm's job is to know which deals fit which lenders' standard box and to route deals accordingly.

Conditional credit approval: some lenders issue conditional credit approval at the LOI stage (subject to satisfactory diligence on defined items). This is a stronger commitment than unconditional issuance subject to credit approval, because the credit-committee step is already complete.

Hedge-cost transparency on swap-priced bank loans

Bank perm priced over swaps carries a hidden cost in the swap-break fee that surfaces only at refi or sale. The borrower pays interest at the swap rate (typically lower than fixed-rate perm); the swap is a separate obligation that requires unwinding if the loan is paid off early.

Swap-break math: the swap is marked-to-market against current swap rates at unwind. When current swap rates are below the original swap rate, unwind requires payment from the borrower (potentially large, sometimes dwarfing the stated prepayment penalty). When current swap rates are above the original swap rate, unwind produces a payment to the borrower.

Diagnostic: at term-sheet stage, request the lender's swap break-fee calculation worksheet for several scenarios (Treasury rates at +100, flat, -100 from current). The worksheet shows the borrower exactly what the swap unwind would cost at refi.

Negotiation lever: some banks will offer a swap-break-fee cap or a fixed-fee alternative to mark-to-market unwind. Available primarily on relationship deals; uncommon on competitive perm bake-offs.

Disclosure: the swap break-fee should be disclosed in the LOI alongside the prepayment penalty so the borrower can model true total prepay cost. LOIs that omit the swap break-fee are incomplete; the borrower should request the additional disclosure before signing.

Diligence-data integrity and the 'discovered issue' retrade

The most common retrade lever is a discovered issue during diligence, an operating result that misses underwriting, a tenant credit issue not disclosed in the package, a property condition issue not flagged in the prior PCA. Defending against this lever starts at the package stage with proactive disclosure of every known issue.

Pre-disclosure: the package should include a candid summary of every known property issue, every known sponsor issue, and every known structural issue. Lenders that discover an issue from the package are far less likely to retrade than lenders that discover the same issue during diligence; the difference is whether the issue was priced into the original LOI.

Common pre-disclosure items: deferred maintenance the sponsor has been deferring, tenant credit deterioration since lease signing, ongoing litigation affecting the property or the sponsor, prior environmental findings even if remediated, prior insurance claims even if closed.

Verification path: the lender will verify package contents against third-party records, property tax records, recorded documents, court records, environmental databases, insurance loss-history reports. Discrepancies between the package and third-party records produce immediate trust loss with the lender.

Closing-document representations: the loan documents will require the borrower to make extensive representations and warranties about the property and the sponsor. Reps that contradict information the lender has independently verified produce closing delays at best and loan rescission at worst.

Frequently asked questions