In one sentence
A borrower's contractual right to extend the loan maturity, usually on conditions and for a fee.
The longer version
Extension options give the borrower flexibility at maturity, typically conditioned on no default, a minimum DSCR or debt yield, an extension fee, and sometimes a new interest rate cap. Bridge and construction loans rely on them.
Exercising an extension is a documented event with conditions to confirm, effectively a mini-closing that benefits from a checklist.
Common questions
- What is an extension option on a commercial loan?
- A borrower's contractual right to extend the maturity date, typically for a fee and only if stated conditions are met at the time of extension.
- What conditions usually apply to an extension?
- No default, minimum DSCR or debt yield, sometimes an LTV test, an extension fee, and for floating-rate loans a new interest rate cap covering the extended term.
- Is an extension option guaranteed?
- Only if every condition is met. A property that misses its coverage test at maturity may not qualify, which is why extension tests are watched well before maturity.
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