Loan Assumption on a commercial property

[Sam Pat]

Hello BP

I am new to this BP Forum and have a newbie question about "Loan Assumption" and pre-payment penalty clause on a commercial property I am interested in.

Property value (asking price) $1,500,000

Original Loan amount: $1,200,000

Current Balance: $900,000 (This loan needs to be assumed)

Term : 15 yrs self amortizing

Interest Rate Type : Adjustable every 5 years (current 4.75%)

Prepayment : Yield Maintenance

1) I would like to get  experts'  opinion on all pros and cons of assuming this loan knowing the fact that interest rate is higher than the existing market rate and it is adjustable every 5 years.

2) With Adjustable Interest Rate, is it up to the lender to increase the rate every years or it can go down? What factors does the lender consider in adjusting this rate every 5 years? Is there any way to challenge if lender decides to increase interest rate without proper justification?

3) How much money I have to take out from my pocket if I assume this loan. Will it be only down payment (say 25%) towards the difference between Property Value and Current Balance ($1,500,000 - $900,000 = $600,000) with another lender?

4)What are other possible expenses involved in this type of transaction knowing the fact that I might end up having deal with two difference lenders?

5) I had a discussion with one lender and he mentioned that he would work out on full loan and I needed to deal with the seller on his current balance. Does this make any sense as there is pre-payment clause?

Thanks in advance

Sam