Risk and Failure ModesNil Masferrer JiménezAugust 26, 2026

Refinance Risk: The Gap Between the Pro Forma and the Term Sheet

The projected refinance is a line in a model. The actual refinance is a term sheet issued on a date nobody chose, priced by conditions nobody could know.

Every fixed-term loan matures. The property's business plan may be complete by then or it may not; the loan does not care.

At maturity the deal must sell, refinance, or extend. Refinancing means a lender issues a term sheet, and the amount on it is determined by the property's income at that moment and by lending conditions at that moment — neither of which was known when the pro forma was written.

Why the new loan can be smaller¶

Lenders size loans against two constraints: a maximum loan-to-value ratio, and a minimum debt service coverage ratio. In most conditions the coverage test binds first, and it is the one that moves with rates.

The mechanism is arithmetic. A given net operating income supports a level of debt service; a required coverage ratio determines how much of that income can go to debt service; and the interest rate determines how much principal that debt service supports. Raise the rate and the supportable principal falls, even if the property's income has not changed at all.

Hypothetical example

The same property, two rate environments

Hypothetical and simplified — real sizing includes amortization, underwriting adjustments and reserve requirements this example omits.

A property produces $650,000 of net operating income. The lender requires a 1.25x debt service coverage ratio, so it will allow $520,000 of annual debt service.

At a 5% interest-only rate, $520,000 of debt service supports a loan of $10,400,000.

At a 7% interest-only rate, the same $520,000 supports a loan of $7,428,571.

The property is identical. The income is identical. The supportable loan has fallen by nearly $3,000,000 because of the rate alone.

If the existing loan is $6,500,000, the deal refinances comfortably in the first case and, in the second, is at the edge — before considering that a lender may also apply a stressed rate or a lower loan-to-value cap than it did three years earlier.

Illustrative arithmetic on invented figures. Not a projection, not an offering, and not a representation about any real transaction.

Now add the more common complication: the business plan underdelivered, so income is $560,000 rather than $650,000. At a 7% rate and the same coverage test, the supportable loan falls to about $6,400,000 — below the existing balance. The difference has to be paid in cash.

Where the cash comes from¶

Three places, and only three.

Reserves, if they are large enough, which after a difficult period they usually are not.

A sale, which converts a refinancing problem into a sale into a market that is offering less than the model assumed.

The investors, through a capital call or through rescue capital entering ahead of the existing equity.

That is the entire list. Understanding it in advance is what makes the sequence predictable.

Extension options, and what they actually require¶

Bridge loans typically carry one or more extension options, and their existence is frequently offered as the answer to maturity risk. Reading the conditions changes the picture.

Extensions generally require:

A performance test — often a minimum debt service coverage or debt yield — which a property that is struggling may not meet. The test exists precisely to prevent extensions for properties in difficulty.
An extension fee, a percentage of the loan balance, payable in cash.
A new rate cap, purchased at the prevailing price, which is the expensive item.

So exercising an extension costs money at the moment money is tight, and requires performance at the moment performance is weakest. That is not an accident of drafting; it is what the conditions are for.

Refinance risk cannot be eliminated and it can be managed, and the difference is visible at subscription.

Match the loan term to the business plan, with room. A loan maturing two years after the plan is expected to complete has absorbed a delay. One maturing in the same month has not.

Size reserves against the gap, not just against the capital budget. A reserve that contemplates a paydown at maturity is a different reserve from one that contemplates only renovation overruns.

Read the extension conditions as conditions. An extension available only if the property hits a coverage test is available only if the plan worked.

Where a sponsor has done all three, the deal has genuine tolerance for delay. Where the debt maturity, the cap expiry and the projected sale all cluster in the same twelve months, the deal is relying on everything going approximately to plan — which may be a reasonable bet and is a different bet from the one the projection describes.

The agency question¶

Many value-add business plans assume an exit from bridge debt into agency financing — the multifamily programs of the government-sponsored enterprises — which is generally cheaper, longer and fixed.

Agency loans require a property already performing to program standards: stabilized occupancy, verifiable income, completed capital work. That is precisely what a repositioning asset does not have until the plan is finished.

So the refinance assumption is not merely an assumption about rates. It is an assumption that the business plan will be complete on schedule, because otherwise the property does not qualify for the debt the model assumed. The two risks are the same risk, and they compound.

The related reading is floating-rate debt and rate caps for the earlier version of the same event, and how syndications fail for where it sits in the sequence.

Primary sources

Every factual claim above is traceable to a filing, a rule or an agency publication. These are the ones this article relies on.

Freddie Mac Multifamily, loan products and financing structuresmf.freddiemac.com
Fannie Mae Multifamily, financing programs and requirementsmultifamily.fanniemae.com
Federal Reserve, Financial Stability Report and commercial real estate exposuresfederalreserve.gov
FDIC, quarterly banking profile and analysis of lending conditionsfdic.gov

Questions readers ask

What is refinance risk in a syndication?

The risk that when the existing loan matures, replacement debt is not available on terms the deal can support — because income is lower than projected, rates are higher, or lenders are sizing more conservatively than when the deal closed.

Why can a new loan be smaller than the old one?

Because lenders size loans on current income and current rates. Higher rates mean higher debt service, which means a given income supports a smaller loan under the same coverage requirement, even if the property is performing exactly as projected.

What happens if the new loan does not cover the old one?

The difference has to be paid in cash at closing. It comes from reserves, from a sale, or from the investors through a capital call.

Do extension options solve this?

Sometimes, and they are usually conditional. Extensions typically require performance tests, a fee, and often the purchase of a new rate cap, which means exercising one costs money at the moment money is tight.

How do I assess this before investing?

Compare the loan maturity date with the projected hold, read the extension conditions rather than noting that extensions exist, and check what the model assumes about the refinance rate and proceeds.