When a deal does not size: how to close the gap

Sooner or later, most borrowers hear the same news. The lender likes the deal, but the loan comes in smaller than the plan assumed. That gap between what you need and what the lender will advance is called a sizing shortfall. It is common, and it is usually solvable. The key is to understand which test is limiting the loan, then work on that constraint instead of shopping the same request to more lenders.

Find the constraint that binds

Lenders size a loan against several tests at once and lend the lowest result. The usual tests are:

• Debt service coverage (DSCR): net operating income divided by annual debt service.
• Loan to value (LTV) or loan to cost (LTC): the loan as a share of appraised value or total project cost.
• Debt yield: net operating income divided by the loan amount, with no regard to rate or amortization.

Only one of these is usually doing the damage. Ask the lender which test set the number, and ask to see the underwriting. A loan held back by coverage needs a different fix than a loan held back by value.

When coverage is the problem

If DSCR is binding, the property or business is not producing enough income to carry the payment the lender has modeled. Options worth testing:

• Review the underwritten income. Lenders often haircut revenue, add a vacancy factor, or include a management fee and reserves you did not budget. Some of those adjustments are fair. Others can be addressed with better support, such as signed leases, rent rolls, or trailing operating statements.
• Change the payment, not the loan. A longer amortization schedule or a period of interest only payments lowers annual debt service and can raise the loan a lender will allow.
• Consider a rate buydown or hedge. Paying points or buying an interest rate cap can reduce the rate used in the coverage test. Weigh the upfront cost against the extra proceeds.

When value or leverage is the problem

If LTV or LTC is binding, the lender is comfortable with the cash flow but not with the cushion beneath the loan.

• Question the appraisal. Confirm that the appraiser used the right comparables, the right income, and the right capitalization approach. Errors happen, and a reasoned rebuttal can be submitted.
• Add collateral. A pledge of another property or other assets can support a larger loan, though it also puts that asset at risk.
• Look at a different lender type. Banks, debt funds, life companies, agency lenders, and CMBS lenders each set leverage limits differently. A loan that is too large for one channel may fit another.

Fill the gap above the senior loan

Sometimes the senior loan is simply the right size, and the rest of the capital has to come from somewhere else. Common sources include:

• Mezzanine debt or preferred equity, which sit between the senior loan and the common equity and cost more because they carry more risk.
• Seller financing, where the seller carries a note for part of the price. This is common in business acquisitions and some real estate sales.
• Additional sponsor or partner equity, including a joint venture or co GP partner who brings capital to the deal.

Each layer adds cost and terms that need to work with the senior lender's documents. Intercreditor rights, consent requirements, and cash flow priority all matter.

Sometimes the answer is the price

If every reasonable fix still leaves a gap, the deal may be telling you something. Lenders are not always right, but when several independent lenders reach a similar number, the market is sending a signal. A lower purchase price, a revised budget, a later closing date to allow income to stabilize, or a smaller first phase can turn a deal that does not size into one that does. Walking away is also a legitimate outcome.

A shortfall is information, not a verdict. Run your numbers through the Debt Sizing tool to see which test is likely to bind before you approach a lender. If you would like a second set of eyes on a deal that is coming in short, reach out to us.