Two term sheets land on the same desk for the same acquisition. One quotes a margin 40 basis points lower than the other. Most borrowers, understandably, gravitate towards the cheaper number — it is the figure that is easiest to compare, easiest to put in a paper to an investment committee, and easiest to defend afterwards if a decision is later questioned. It is also, on its own, close to useless as a measure of which loan actually costs less over the life of the deal, because margin is only one line in a contract that determines how much flexibility the borrower has to run the asset the way the business plan requires.
Why the coupon is not the cost
The habit of comparing loans on margin alone comes from treating debt as a commodity — money is money, and cheaper money is better money. Commercial property debt does not really work that way, because the contract wrapped around the money determines how much of the borrower’s own plan for the asset the lender is prepared to accommodate, and departing from that plan under a restrictive facility can cost far more than the margin ever saved.
Arrangement fees, legal costs and valuation fees are the most visible non-margin costs, and a sophisticated borrower already prices these into a like-for-like comparison as a matter of course. Even the quoted margin needs some context: floating-rate sterling loans commonly use SONIA, the benchmark administered by the Bank of England, with floors, hedging requirements and other provisions affecting what the borrower actually pays. Commitment fees on undrawn funds and the timing of drawdown can alter the economics further, particularly where funding is needed for an acquisition or staged refurbishment. The conditions that must be satisfied before money is released are equally important; as Moore Barlow’s discussion of real estate finance conditions precedent explains, a committed facility does not necessarily mean all the money can be drawn whenever the borrower wants it.
The larger and less visible costs sit inside the covenant package, the amortisation profile and the asset-management restrictions — the parts of the loan agreement that only start to matter once the borrower needs to do something with the property that was not fully anticipated at drawdown. A tenant requiring a different lease structure, a refurbishment programme that changes scope or an attractive opportunity to sell can expose restrictions that looked inconsequential when the term sheet was first agreed. The cost may be a lender’s consent fee, but it can just as easily be a delay, a missed letting or a restriction on how much cash the investor can take out of the property.
Where the real difference in outcome comes from
Amortisation is the first major lever. An interest-only loan preserves cashflow throughout the term, which suits an investor planning to hold, re-lease or refurbish the asset and rely on eventual sale or refinancing to repay principal. A loan requiring regular capital repayment reduces outstanding debt over time — lowering interest exposure and refinancing risk at maturity — but it also reduces distributable cashflow during the loan term, which can matter considerably to an investor relying on income to fund works or make distributions to its own backers. Repaying principal is not an additional borrowing expense in the same sense as interest or fees; it reduces the liability while tying up cash that could otherwise be deployed elsewhere. Neither structure is inherently superior, and a lender offering a lower margin with mandatory amortisation may leave a borrower with less usable cash each year than a higher-margin interest-only alternative.
Financial covenants — principally loan-to-value and interest cover or debt service cover tests — determine how much headroom the borrower has before restrictions or more serious contractual consequences are triggered, independent of whether scheduled payments are being made. A loan with tight LTV and income covenants, tested frequently, can come under pressure because a valuation has softened or a tenant has vacated, even while the borrower continues meeting its payment obligations. Cash traps and cash sweeps sit alongside these: a cash trap can restrict distributions at an agreed threshold without necessarily constituting an event of default, while a cash sweep diverts surplus cashflow towards debt repayment. Both are familiar lender protections, but the trigger levels, testing frequency, cure rights and circumstances in which trapped cash is released can differ substantially between facilities. CBRE’s analysis of cash traps in commercial property lending illustrates how a property can continue generating income while its owner loses access to part of the cash it expected to receive.
Hedging requirements add a further layer of cost and constraint that is easy to underweight at the term-sheet stage. A lender may require a rate cap or swap covering some or all of the loan, and the economics of that protection can be substantial. A cap commonly involves an upfront premium, while a swap can have a positive or negative termination value depending on how rates have moved. Prepayment provisions matter just as much at the other end of the loan’s life: a facility that is cheap to enter but expensive to exit early can leave the borrower holding an asset, or maintaining debt, longer than the investment strategy would otherwise dictate. Andrew Jackson Solicitors’ analysis of borrowing costs explains how repayment charges and break costs depend on the terms of the facility and the timing of the exit.
Asset-management flexibility is where the practical difference between two similarly priced loans often shows up most starkly. Permitted capital expenditure, permitted disposals, leasing restrictions and consent requirements for refurbishment or redevelopment determine how freely the borrower can execute the business plan without returning to the lender for approval each time circumstances change. A value-add investor planning to re-lease, refurbish or partially redevelop an asset needs a facility that anticipates that activity and permits it within agreed parameters; a facility drafted for a passive, long-let income asset may require lender consent for changes the strategy needs to make routinely, turning asset-management decisions into negotiations with the lender. On a portfolio loan, even an agreed disposal may require a substantial portion of the proceeds to repay debt before the lender releases its security over the property being sold. Reporting obligations, guarantees and change-of-control restrictions can create further complications where the borrowing vehicle needs to introduce new equity or restructure ownership during the term.
Two loans, same purpose, different outcomes
Consider two facilities offered against the same asset and the same broad investment plan. Both have the same initial loan amount and interest-rate benchmark, but their contractual terms differ.
| Loan A | Loan B | |
|---|---|---|
| Margin | 40 basis points lower | 40 basis points higher |
| Amortisation | Mandatory scheduled capital repayment | Interest-only throughout |
| LTV and income covenants | Tighter, tested quarterly | More headroom, tested semi-annually |
| Leasing consent | Lender approval required above modest thresholds | Pre-agreed leasing parameters, limited consent needed |
| Refurbishment and capital expenditure | Requires separate lender sign-off | Permitted capital-expenditure budget agreed upfront |
| Prepayment | More restrictive early-repayment terms | More flexible early-repayment terms |
On a £10 million loan, 40 basis points amounts to £40,000 a year, or £120,000 over three years, if the whole balance remains outstanding and the benchmark is the same. That is a useful measure of the headline pricing difference, although Loan A’s scheduled amortisation would reduce its balance and therefore change the actual interest comparison. The wider financial assessment needs to account for fees, debt repayments, retained cash, the timing of the proposed works and the terms on which the investor expects eventually to exit.
Loan A looks cheaper on the headline figure that would appear in a comparison table circulated to an investment committee. For a passive hold strategy on a long-let, low-risk asset, it may genuinely be the better choice — the tighter covenants cost little if the plan is simply to collect rent and hold to maturity, while the lower margin represents real savings. For an investor planning active asset management — re-letting vacant space, running a refurbishment programme or repositioning the asset during the loan term — Loan B’s flexibility can be worth considerably more than the margin difference. Every consent Loan A requires adds potential time, cost and execution risk to a strategy whose returns may depend on acting quickly. An early sale can further change the calculation if one facility allows repayment on substantially better terms than the other.
Why different lenders write different contracts
Banks, insurers, debt funds and specialist private-credit lenders do not just price risk differently; they structure it differently, reflecting the capital, funding and regulatory constraints each operates under. Banks often work within established credit policies and standard covenant requirements, while insurers, managing longer-duration liabilities, may favour longer-term lending against stable, well-let income. Debt funds can offer more tailored structures for transitional assets, higher leverage or complicated investment plans, sometimes at a higher margin. These are tendencies rather than fixed divisions between lender types: a bank can provide a flexible facility, and a debt fund can demand extensive covenants, security and prepayment protection.
The growth of alternative lending has nonetheless changed the choices available to borrowers. Bayes Business School’s May 2026 review of UK commercial real estate lending recorded debt funds’ share of new lending rising from 12% to 28% during 2025, reflecting a market in which non-bank lenders have become a much more significant source of property finance. The greater range of funding sources can give investors access to different leverage levels, repayment structures and approaches to transitional risk, although a wider choice does not necessarily make negotiating an individual facility straightforward.
The importance of contractual flexibility is also reflected in the financing policies of established property investors. British Land’s published financing principles explicitly recognise the need for arrangements that accommodate acquisitions, disposals, development and asset management, including flexibility around secured property portfolios. A large listed landlord has financing options that many smaller investors will never be offered, but the underlying commercial issue is familiar. The ability to sell an asset, substitute security or redeploy capital can have genuine financial value, particularly where an investment strategy involves more than collecting rent from a static portfolio.
The question that actually matters
The right question when comparing two facilities is not which one is cheaper, but which one gives the investor enough room to execute the specific plan for this specific asset without needing to renegotiate the loan every time circumstances shift. A passive, long-income hold and an active value-add repositioning are different businesses wearing the same legal form of “commercial property loan”, and they need different contracts to match. Pricing the contractual terms — what they cost in flexibility, in consent delays, in early-repayment friction, and in covenant headroom — alongside the margin is not a nice-to-have refinement of an otherwise simple decision. For any strategy beyond a straightforward hold-to-maturity, it is frequently where the real cost of the loan actually sits.
This article provides general commercial property finance information and analysis, not lending, investment, tax, valuation or legal advice. Financing terms, security arrangements and lender rights vary by agreement and jurisdiction. Obtain appropriate professional advice before entering into, varying or repaying a commercial property facility.
