Locate the binding constraint and identify when it changes.
Loan sizing is often described as choosing the lowest of several limits. That works only when each limit was calculated under terms that actually apply to the proposed amount. A larger loan can move into a different pricing, coverage, fee, or reserve tier. The resulting feasible amount may grow in steps, pause at a boundary, or produce less usable cash than a slightly smaller loan.
A historical loan agreement filed with the SEC contains separately conditioned additional advances in section 2.03. That is evidence that availability can depend on contractual tests, not a source for the fictional tiers below. This guide’s original contribution is a piecewise sizing worksheet with an explicit distinction between maximum principal and maximum net proceeds.
Define the feasible region before solving
For each proposed structure, record the amount range, cash-flow definition, coverage requirement, payment constant, value limit, fees, reserves, and eligibility conditions. Mark whether a boundary is inclusive. “Up to $4 million” and “above $4 million” need different tests at exactly $4 million.
A proposed amount is feasible only if it satisfies the requirements of the tier it occupies. Calculating a high-tier limit below that tier’s minimum does not create an eligible high-tier loan. Similarly, using a low-tier rate to justify an amount above its maximum crosses the boundary without applying the new terms.
Do not force qualitative conditions into a numeric formula. If a property fails eligibility or a required report is unavailable, label the result conditional or unavailable rather than showing a precise loan amount that cannot currently be executed.
Build two entirely hypothetical tiers
Assume the following invented financing terms. Tier A applies to loans of $2 million through $4 million inclusive, uses a 1.25-times coverage requirement, and an 8% annual debt-service constant. Tier B applies above $4 million, uses 1.30-times coverage and a 9% annual constant. Both have an assumed $5.2 million value-based ceiling.
For recognized annual cash flow C, Tier A’s cash-flow limit is C / 0.10, capped at $4 million. Tier B’s limit is C / 0.117, but it is valid only above $4 million and below the shared value ceiling. The constants are assumed inputs, not note rates or market quotes.
| Hypothetical cash flow | Valid Tier A maximum | Tier B arithmetic result | Maximum feasible gross loan |
|---|---|---|---|
| $380,000 | $3,800,000 | $3,247,863, outside Tier B | $3,800,000 |
| $420,000 | $4,000,000 | $3,589,744, outside Tier B | $4,000,000 |
| $460,000 | $4,000,000 | $3,931,624, outside Tier B | $4,000,000 |
| $470,000 | $4,000,000 | $4,017,094 | $4,017,094 |
| $480,000 | $4,000,000 | $4,102,564 | $4,102,564 |
| $520,000 | $4,000,000 | $4,444,444 | $4,444,444 |
Cash flow improves between $420,000 and $460,000 without increasing feasible principal. Tier A has reached its boundary, and Tier B’s tighter payment test does not yet support an amount above that boundary. Tier B begins to allow more than $4 million only when cash flow exceeds $468,000.
Optimize the amount the transaction actually needs
Now add fictional fees: Tier A charges 1% of the entire loan and Tier B charges 2% of the entire loan. No other deductions apply. A $4 million Tier A loan nets $3.96 million.
At $470,000 cash flow, the maximum Tier B loan is approximately $4,017,094, but it nets only $3,936,752 after the 2% fee. That is less usable money than the smaller Tier A loan. Choosing the highest feasible gross principal would therefore miss the better net-proceeds result under these assumptions.
Tier B must reach approximately $4,040,816 gross to net the same $3.96 million. At its 0.117 annual cash-flow factor, that requires about $472,776 of recognized income. The gross-loan crossover and net-proceeds crossover are different thresholds.
This is not an argument that a lower fee always wins. Rates, maturity, repayment rights, reserve accessibility, and execution conditions also matter. The worksheet isolates one measurable objective so the investor does not confuse “more debt” with “more cash available.”
Check other discontinuities explicitly
Minimum loan amounts can turn a positive sizing result into an unavailable execution. A required reserve triggered above a leverage threshold can reduce net proceeds abruptly. A performance earn-out can create additional availability only after an evidence test is met. Record each condition with its exact basis and effective point.
When the fee or reserve depends on the final loan amount, solve the equation using that dependency. Do not estimate the deduction on a different principal and then add the resulting cash to the larger loan. Preserve full precision until the final display, especially near boundaries.
Deliver the feasible alternatives, not one unexplained number
Show each tier’s arithmetic result, validity check, controlling constraint, gross principal, deductions, and net proceeds. Explain why an apparently larger result is invalid or less useful. If the borrower needs a particular cash amount, test whether each valid option actually meets it.
The final decision can then compare feasible structures with transparent tradeoffs. A piecewise worksheet is particularly useful when an offer changes at a size threshold: it exposes plateaus and fee jumps that a single minimum-of-three formula would otherwise hide.
Sources and evidence
- SEC-filed Dean Member LLC mezzanine loan agreementSections 2.02 Use of Proceeds; 2.03 Loan Advances; 4.05 Reserve Disbursements · Checked 2026-10-21 · One historical agreement illustrates separate uses, advances and reserve conditions; it does not govern another transaction.
Source dates and applicability matter. Report an error or a changed source.