Commercial Loan Question

[Tom Doherty]

Good morning BP,

I listened to the most recent podcast about BRRRR and Partnership (Great episode). @Brandon Turner mentioned something along the lines of a balloon payment on some of these commercial loans.

Couple questions.

1.Can someone explain a commercial loan with a balloon payment?

2. What happens if you can't pay the remaining balance back? Do you refinance?

3.Are there commerical loans without balloon payments?

4. What are the pros & cons.

I apprecaite the help.

[Mike Dymski]

A commercial loan may have a 15/20/25/30 year amortization but also a balloon payment (full loan amount) due after 3/5/7/10 years.  Yes, the loan is essentially rolled over or refinanced at the balloon payment date.  The existing lender, in many cases, will like to roll it over and continue to follow the remaining amortization schedule rather than re-amortize the loan.  You can also refinance with the existing lender (if permitted) or another lender.

Yes, there are commercial loans without balloon payments...hybrid products that have a fixed rate for 5/7/10 years and then float afterwards.  My apartment loan is fixed for 7 years and then floats for the remaining 18 years (no balloon).

Many commercial investors match their loans terms with the property strategy.  If it's a long term hold, they may get a 10 year fixed rate loan (and/or a hybrid product)...or, with a short term hold strategy, they will get a shorter term loan.  Longer term loans come with slightly higher rates and larger loan prepayment penalties.  Many astute investors will get a longer term loan than needed for the property strategy to help mitigate the risk of economic cycles.

Hope that helps.