Two Commercial Real Estate Lending Questions - thanks for help
How does an earnout work when financing a commercial property? We plan to lease up additional vacant space when we close on a property, which will boost our NOI and increase the value of our property. Once this happens a lender is offering us an earnout. Is this similar to refinancing? How does this benefit us? 

How does a SWAP interest rate work with commercial property financing? What are the pros and cons?
[{"id": "hzwow4a", "text": "In an earnout you basically close for a higher loan amount and you get the extra funds when you meet the qualifications spelled out in your loan agreement (C per square foot, Y square ft, for a minimum of Z duration or something to that effect). It usually has to do with stabilization so once the lender's risk is reduced. Saves you refinancing costs and interest rate risk in the interim.\n\nA swap is a tripartite agreement. You agree to pay the bank a floating rate, the bank agrees with the counterparty to pass on your floating rate in exchange for a return payment that makes your fixed rate. The accounting is somewhat complicated but essentially the bank doesn't want the interest rate risk on your loan and are laying that off on a 3rd party. \n\nPros: you usually get a better initial floating rate because there is spread with a NPV built into the transaction (bank's fee).\n\nCons: accounting is a bit confusing because you pay variable and get a return payment which nets you to the swap fixed rate. There is also a make whole or break fee or unwind associated with this so don't do it if you're not planning on holding for the duration. \n\nMixed: as interest rates move your swap could have a positive or negative value on the unwind that has to be accounted for annual and an unrealized gain/loss. There are people today who have a huge gain in their swaps from last year &amp; there are people massively underwater from their swaps in 2018 but it doesn't really matter unless you unwind it. YMMV\n\nAlso, you have to be a qualified party to enter a swap so you're going to have to chin some bars to even participate in one. Have you already had your first disclosure call on it?", "replies": [{"id": "hzx57ll", "text": "Great response. One thing missing- in an earnout you pay interest on the entire loan amount day one. So unless you\u2019re 95% sure you\u2019ll lease the space at the terms the lender UW at or better, I would wait to finance or do a short term floater where you can refi out quickly to a fixed rate loan and take advantage of that leased space.", "replies": [{"id": "i002sml", "text": "I think this is lender specific. We have done earnouts with some lenders that hold the funds in a reserve where the Borrower does not pay interest until earned. Other times the Borrower pays for the entirety of the loan, pre-earnout. Definitely request the language from the lender on this piece.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]