Commercial loan balloon payments

[Alex Silang]

Newbie question here.

Commercial loan have balloon payments due in 10 years or so.

What if it's a bad environment (recession)? Will the bank typically roll it over? If you have first hand experience please chime in.

[Bryan Hancock]

Lenders will sweet talk you when you ask about this risk. They'll tell you that they "typically extend" the loan and when you probe they'll start to play all sorts of games. The simple fact is that they'll do what is in THEIR best interest if the environment isn't right to extend the loan because their ratios are out of whack. If you have a 10-year loan you should have a multi-year window to work on a refinance and should not wait until the very end of the loan to extend your term.

For many investments your optimal sell year will come before year 10 after you have improved operations. Holding for additional years will decrease the return on your equity. You need to size your debt duration to the business plan for the property you're working on. If you intend to hold the property forever and the rates are as low as they are now you should pony up the small premium and get 30-year money if it exists for your project type. It will be money well-spent.

Make sure to ask about prepayment penalties, lockouts, etc. when you are pricing the money. The market for commercial loans is quite different than residential loans, which are largely a commodity with all of the gov-mint interference in the market.