To increase the odds of having an offer accepted, buyers of commercial property can get a standby commitment. A standby commitment is an agreement signifying a lenders intent to give a future loan. To get a standby commitment, a buyer will usually pay a standby fee.
A standby commitment is designed to be a two way transaction that does not go any further than the terms that are agreed upon by the borrower and the lender. This differs from a line of credit as the commitment is over once obligations are met on both sides, where dealing with credit may include paying back a par or all of the amount due while still having access to the credit for the foreseeable future.
When & How Standby Commitments Are Used
Many developers use standby commitments when they are in need of a construction loan, but do not want all of the additional costs and obligations that come with permanent financing. Permanent financing can cost a developer additional funds with the high interest rates and prepayment penalties that are tacked onto a loan. A developer can avoid these unwanted interest rates and penalties by paying the standby fee. Upon completion of the project, an owner or developer is then able to choose to continue with permanent financing, sell the project all together, or wait in anticipation of the interest rate falling.
