Real Estate Finance: Holdbacks in a Post COVID Environment

Today’s post COVID environment has commercial real estate owners, investors and lenders reaching for their crystal balls. Rising sales prices for assets, capitalization rate compression, rising interest rates, and a recession on the horizon – how does a property owner or lender adequately protect itself in financing for the bumpy few years to come? Undoubtedly, there will be disconnects in pricing and structure for acquisitions and refinances. One potential loan structuring device to consider is the implementation of a loan holdback. A holdback (also referred to as an earnout) in commercial real estate finance is a provision that puts aside (or reserves) a certain portion of loan proceeds until an objective has been accomplished. Typically, holdbacks are used for an issue that is not resolved or settled prior to closing but can be resolved soon thereafter.