Commercial Loan questions - Amortization and Balloon.

[Grant Gaffney]

Newbie to the forums, had questions about commercial loans.

For a commercial loans I understand they vary upon what lenders are willing to lend, but are there certain advantages to structuring the loan a certain way? (Amortized over 20 vs 30 years or balloon at 5 vs 10 years?). Aside from what the lender is willing to lend is this just borrower preference or is there certain strategies to picking a certain amortization schedule and ballon payment date? If so, do strategies differ based on niche of investment (Multifamily vs retail)?

Or is it simply try to borrow with the longest amortization schedule and furthest ballon date possible to maximize cash returns?

[Joel Owens]

I wanted to expand on retail properties for lending.

There is a vast difference between STNL ( Single tenant net lease) and MTNL (Multi tenant net lease) properties.

Single tenant you have just one income stream for the property and multi tenant you tend to have various businesses categories propping up the cash flow to service the debt. If a single tenant goes out you have break occupancy being negative as no income is coming into the property whereas with a retail center break even occupancy might be 65% after the down payment. So in that case you might could still cover the existing mortgage with the cashflow until you release the vacant spaces. So properties have different underwriting models based on credit tenant type, stnl or mtnl, how many primary years left on the lease, lease staggering, termination clauses, co-tenancy clauses, restrictive use clauses, lease guarantees for personal and corporate, disclosure of ongoing sales, association by laws, etc. 

STNL typical is 30% to 35% down minimum with  a max 25 year amortization  schedule fixed for max 12 years.

MTNL 25% down minimum to 35%. Up to 10 years fixed rate around 4.5% for high quality assets and 25 to 30 year amortization. I am talking properties in the many millions in price not the sub 1 million mom and pop type stuff. That tends to be local banks that want to fund that and plan on maybe 5 year fixed with 20 year amortization and current interest rates in the 5's. You have to get that small ball stuff at really high cap rates to maintain the 100 basis points more cost on the debt for good spreads and cash flow.