A different test binds for different properties, so the release price has to be computed asset by asset, in the order the business plan sells them.
A release price is what the borrower must repay to take one property out of a portfolio loan. It is usually the greater of a percentage of the property's allocated loan amount, often 110 to 125 per cent, and whatever paydown keeps the remaining pool's debt yield or LTV at its closing level. On an illustrative $100,000,000 loan over four properties, selling the highest-yielding asset costs $19,900,498, 119.4 per cent of its allocated loan amount, because the debt yield test overrides the 115 per cent premium.
Worked in full in How to Read a Real Estate Loan Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Portfolio loans let a sponsor sell assets one at a time without refinancing. The release price clause decides how much of each sale goes to the lender and how much to the sponsor, and it is written to stop the sponsor selling the best assets and leaving the lender with the rest. Reading it means computing every test for every property, because a different test binds for different assets.
| Property | Value | NOI | Yield | Allocated loan (ALA) |
|---|---|---|---|---|
| A | 50,000,000 | 3,000,000 | 6.00% | 33,333,333 |
| B | 40,000,000 | 2,600,000 | 6.50% | 26,666,667 |
| C | 35,000,000 | 2,450,000 | 7.00% | 23,333,333 |
| D | 25,000,000 | 2,000,000 | 8.00% | 16,666,667 |
| Portfolio | 150,000,000 | 10,050,000 | 6.70% | 100,000,000 |
The loan is $100,000,000, a 66.67 per cent LTV and a 10.05 per cent debt yield. Allocated loan amounts are set in proportion to value. The release price is the greater of 115 per cent of ALA and the paydown that keeps the debt yield at or above 10.05 per cent. Selling costs are 1.5 per cent.
Test 1: 115% × ALA
Test 2: loan − remaining NOI ÷ closing debt yield
Release price = MAX(test 1, test 2)
In Excel: =MAX(1.15*ALA, Loan-(TotalNOI-NOI)/10.05%). An LTV maintenance test, loan − closing LTV × remaining value, equals 100 per cent of ALA when ALAs are allocated by value, so it never binds above a 115 per cent premium.
For property D: ALA is 16,666,667, so test 1 is 19,166,667. After the sale the pool earns 8,050,000 of NOI; at a 10.05 per cent debt yield that supports a loan of 80,099,502, so test 2 requires 100,000,000 − 80,099,502 = 19,900,498. Test 2 binds by 733,831. On a 1.5 per cent cost, the sale nets 24,625,000 and the sponsor keeps 4,724,502.
| Property | 115% of ALA | Debt yield test | Release price | % of ALA | Sponsor keeps | Debt yield after |
|---|---|---|---|---|---|---|
| A | 38,333,333 | 29,850,746 | 38,333,333 | 115.0% | 10,916,667 | 11.43% |
| B | 30,666,667 | 25,870,647 | 30,666,667 | 115.0% | 8,733,333 | 10.75% |
| C | 26,833,333 | 24,378,109 | 26,833,333 | 115.0% | 7,641,667 | 10.39% |
| D | 19,166,667 | 19,900,498 | 19,900,498 | 119.4% | 4,724,502 | 10.05% |
The premium binds on the three lower-yielding assets and the debt yield test on the highest-yielding one. Property D is 16.7 per cent of value but 19.9 per cent of NOI, so repaying only 115 per cent of its value-based allocation would leave the pool at a 9.96 per cent debt yield, below where the lender started. The test exists to stop exactly that, and it costs the sponsor 733,831 of the sale.
Selling A instead, the lowest-yielding asset, lifts the pool's debt yield to 11.43 per cent and the premium does all the work. The sponsor keeps 22.2 per cent of net proceeds from A, B or C, but only 19.2 per cent from D. When ALAs are set by value and the release test uses income, the assets that are cheapest to sell are the ones the lender least minds losing.
The premium does not take money away from the sponsor overall; it changes when the sponsor receives it. Selling D, C and B in that order returns 21,099,502 to the sponsor, against 31,833,333 if each released at 100 per cent of ALA. The 10,733,831 difference stays in the loan and comes back on the last sale, when A releases the remaining 22,599,502 and the sponsor keeps 26,650,498. Total sponsor cash is 47,750,000 either way, undiscounted: the sponsor gives up the time value of the deferred cash and saves interest on the debt repaid early.
Some agreements set the release price at the greater of the ALA premium and a share of net sale proceeds. With a floor at 90 per cent of net proceeds, every property releases at 133.0 per cent of ALA, and the sponsor keeps only 10.0 per cent of each sale.
| Property | Net proceeds | Without floor | With floor | Sponsor keeps, with floor |
|---|---|---|---|---|
| A | 49,250,000 | 38,333,333 | 44,325,000 | 4,925,000 |
| B | 39,400,000 | 30,666,667 | 35,460,000 | 3,940,000 |
| C | 34,475,000 | 26,833,333 | 31,027,500 | 3,447,500 |
| D | 24,625,000 | 19,900,498 | 22,162,500 | 2,462,500 |
At a 66.67 per cent LTV, a proceeds floor of 90 per cent is a near-cash-sweep on disposals. A sponsor whose business plan funds capex or distributions from early sales should treat it as such.
The common mistake is to model the release price as the premium alone and assume each sale returns the same share of proceeds. Run every test for every asset, in the order the business plan sells them, because the debt yield test is computed on the pool that remains and changes after each release. The same discipline applies to the extension conditions, sized in how much paydown a loan extension test needs, and to the trap that follows a debt yield breach, in how long a cash sweep takes to cure debt yield.
Release price = MAX(premium × ALA, loan − remaining NOI ÷ closing debt yield), plus any proceeds floor. Here it is 115 per cent of ALA for three properties and 119.4 per cent for the highest-yielding one. The premium front-loads deleveraging rather than costing the sponsor money; the floor is what changes the economics. The free workbook for this case includes a one-page model for testing your own loan's provisions.
The share of a portfolio loan assigned to each property, usually in proportion to value or NOI at closing. It has no effect until a property is released. On a $100,000,000 loan over $150,000,000 of property, a $25,000,000 asset carries an ALA of 16,666,667, and a 115 per cent release price on it is 19,166,667.
To make each sale deleverage the remaining pool. At 115 per cent, selling the lowest-yielding asset first takes the debt yield from 10.05 to 11.43 per cent. The premium does not cost the sponsor overall: on these four assets total sponsor cash is 47,750,000 either way before time value and interest, but 10,733,831 of it moves to the last sale.
Yes, when the asset sold earns more than its value share. Property D is 16.7 per cent of value but 19.9 per cent of NOI. Releasing it at 115 per cent of ALA would leave a 9.96 per cent debt yield; holding 10.05 per cent requires 19,900,498, 733,831 more than the premium alone.
This article is one calculation from How to Read a Real Estate Loan Agreement. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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