COMMERCIAL LOAN IS DUE NOW WHAT?

Question

Hi BP, My question is, after a commercial loan is due, for example 10 years loan with 30 years amortization. Then a balloon payment is now due for the remaining balance. What options are available in order for you to keep owning that same property other than paying the full amount of the remaining balance?

Like what type of strategies you guys use in the this situation. Thanks in advance!

Like what type of  strategies you guys use in the this situation. Thanks in advance!

Dan Wallace · Answer

Hopefully, you would know well in advance of the balloon/maturity whether your existing lender was going to re-fi the note. I would start those discussions several months in advance of the balloon but in general you should know their intent on refinancing or not. If you have made your payments on time and in general been a good credit, then they should be willing to re-extend.

Depending on the terms or any prepayment penalty, etc, you should also be keeping an eye on possibly refinancing to better terms or to extend the note prior to balloon/maturity. After ten years of principal reductions and hopefully market appreciation, a refinance of a good credit should be relatively easy.

Bob Langworthy · Answer

I agree with @Dan Wallace. The balloon gives you the opportunity to refinance. The same bank may have a good financing option for you or you may want to look elsewhere. I have a balloon coming in 4 years and I'm looking forward to it.

Hope this helps,

Dan Wallace · Answer

One more thing to think about. If you wait until the balloon maturity and the economy has taken a downturn you may be faced with a tough task of refinancing your note even though you have made every payments, etc. During the last recession I saw many notes that came due and even though all payments were made on time and the borrower/property was still creditworthy, the current noteholder would not refinance nor could they get anyone else to handle the refinance.

Ronald Rohde · Answer

Anyone can do this at lower price points. Save cash during boom years, purchase assets properly leveraged in recession, sell or refi when economy comes back. Key is confidence that the value will come back and you have enough management experience and cash reserves to maintain property/debt service through the recession.

Leverage is a powerful tool, but must be wielded properly.

Patricia Steiner · Answer

Definitely approach the commercial lender who has the loan now.  Refinancing a balloon payment is common (I'm a former banker and I wanted to keep those loan balances and my clients!).  It will also save money from being able to avoid getting a new appraisal, updated title, and loan origination/junk fees.  Get with the lender now...it's easier to do when the balloon isn't past due.

Jay Hinrichs · Answer

this led to a lot of the cascading problems..  example:  Small regional bank makes loan ... bank fails  ( 400 banks in Georgia failed in the GFC)  Assets are sold to a hedge fund like Rialto..   those boys come in and they have no interest in work outs or extending or redoing the loans they are not in the loan business.. commercial loans in those days were next to impossible.. now Rialto wants a DIL or they will foreclose .. I had 2 of my vendors forced into bankruptcy this way to save their buildings or get them time to have a logical exit.. but then prices were way down..

Normal conditions as others stated as long as your commercial bank is in good shape and still likes that product.. refis are not an issue.

only an issue when things get wild and credit gets very tough..

Joel Owens · Answer

A lot of pre-pay penalties go away after year 5 to zero. So if you are in last 5 years of a ten year loan there is a chance no pre-pay penalty. If you know you want to hold for a lot longer time versus sell then depending on situation you might be able to refi and pull cash out if value of the property has improved a lot over the years.

It can be true that when downturn happens banks tighten loan terms. People with lot's of money 9 figures and above typically go against the herds and while debt is cheap and LTV is high they lock in long term debt and preserve cash. Then when down turn happens they are flush with cash when lending reduces or dries up and can scoop up properties cheap and ride the next wave up to sell. This is all based on the premise of course that they buy their assets with leverage properly and conservatively.

Your bank could have gotten bought out over the years with a merger or where they once loved lending on that type of commercial asset they are now moving away from it to rebalance their portfolio. So it is not a given they will have the best refi rates or new loan terms. Another lender that is trying to grow might be more aggressive.

Trey Golston · Answer

You would need to refinance the note. The same lender you got the original note from will usually refinance unless there was some kind of new problem with the property or yourself as the borrower.

Ken Jernigan · Answer

What could possibly go wrong? 1) Value of property declines; 2) Cash flow of property declines; 3) Your personal credit deteriorates; 4) Interest rates go up; 5) Current lender gets bought out; 6) Current lender has portfolio restrictions; 7) Your buddy the loan officer is no longer there.  All good reasons to start early and shop the refi.

Get your lender package together soon so you don't waste time looking for tax returns, bank statements, PFS, etc.

Jose Ortega · Answer

@Dan Wallace... then that would be the ugly side. Anything else that could possible go wrong that you might think of? Thank you!

COMMERCIAL LOAN IS DUE NOW WHAT?

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