The hangout is the expected outstanding loan balance owed the lender by the borrower at the end of the lease term of a key tenant, while the hangout risk is the risk to the lender associated with the borrower’s ability or inability to repay said loan. An especially important consideration in investments with a single tenant, the hangout risk is determined by comparing the hangout to the dark value (value of the vacant real estate) to determine whether the borrower will be able to repay the loan. This risk can be quantified by dividing the hangout by the dark value.
For example, a borrower secures a 100,000, 20-year loan against a property leased to WalBlues for 15 years. At the end of year 15, the outstanding loan balance is expected to be 50,000. The lender projects the value of the vacant property in year 15 to be 50,000. Therefore the hangout risk is high, as represented by the expected LTV at the end of the lease term (50,000 ÷ 50,000 = 100%), since the borrower will need to re-lease the property before year 20 to be able to refinance the property to repay the lender.