Commercial Lending Terms

[Jason V.]

I've been working on a deal for a small commercial apartment building (5 units.) If this were a 4 unit instead of 5 (chop a unit's worth of everything off) I would have already bought it. BUT the commercial lending side of things is pretty intimidating to me because I've never used it before. (The flip side is this would be another property without needing to get another conventional mortgage.)

I met with the commercial lender for the bank I have most of my business with (mortgages and LOC) to discuss some things, and I know there won't be any issue actually getting the loan.

Right now I would be looking at 20% down, 5 year fixed (4.75% right now, which is the floor) that adjust to 5 Year Treasury plus 3.5%, 10 year maturity, 15-20 year amortization. 

So I think I understand everything, but my concern is what the rate goes to after the first 5 years. What's a realistic expectation for rate adjustment? What's a worst case scenario? If the deal still makes money at 15%, then I almost can't say no - and just hope it stays low so I make more. I know it'll be in the fine print, but what's typical for adjustment periods once the fixed term is over? Every year? Every day?

How much do I need to be concerned about refinancing at the 10 year mark? I either need to have a 2nd lender setup on the chance this bank won't go another term, or have the money in the bank to pay it off, right? If I don't 'spend' the cashflow from the deal I could get it to pay itself off within the original 10 year mark...but then I'm not making very good use of my money either. 

Thanks All!

[Karen Schimpf]

@Jason V.  Today the 5 year treasury is around 1.35. The 5 year treasury highest rate in the last 10 years was in 2006 at 5.10.  So if the rate is 5.10 and the spread is 3.5 the rate would be 8.6%, still not 15%.  There are no guarantees but at least that should put your mind at rest.

I recommend  not wasting  any more of your time trying to get a better rate than 4.75% on a 5 year with 20 year amortization. The rate is competitive for this small deal. There is a lot that goes into issuing a rate on a commercial deal.  Like population, the class of the property, if the property cash flows, if the property is 90% occupied, the crime rate, your credit, your reserves etc.   Your time is ticking down and you shouldn't be wasting it over negotiating  .125 of point.   You will need every day of the 60 to 90 days to get your deal closed since the volume is very high right now.  Get your documents in ASAP.

Lastly about the comment about getting a FHA Commercial HUD. The program makes sense on loan amounts around $3MM+. The programs is awesome! The rates are in the 3's with a 35 year term and a 35 year amortization for a purchase. The loan to value is 83.3%. Once again, you will not be able to go this route since your loan amount would not be enough.

Wishing You the Best.