Commercial loan refi asking Prepayment Penalty?

Question

Aloha BP fam, Im doing my first cash out refi on a 6 unit residential property and one of the Bank's terms is a prepayment penalty starting at 5%. Is this common? I'm thinking of requesting they take that out but the rate is great. Also a half point commitment fee. Thoughts?

Jiva Segaran · Answer

Thanks for the input, ok the consensus is that it is normal especially being my first with this bank so I plan on asking them to drop it but if they say no, maybe make up better terms on the next loan with them.

Rate is very good 4% with half point and cash out so I'll def move forward either way.

John Bonhomme · Answer

I signed a commercial refi that started out prepayment at 7% prepayment for year 1. There aren't many institutions lending Cash Out's right now so I would jump all over it especially if your rate is good. It doesn't hurt to ask them to drop it but definitely don't lose the loan over it.

Heather A. · Answer

Commercial loans with fixed interest rates have pre-payment penalties. 5-4-3-2-1% in years 1, 2, 3, 4, and 5 respectively is a typical structure, as is 3-2-1 in years 1, 2, 3.

Commercial loans with floating interest rates (tied to LIBOR, prime, t-bills plus or minus percentage points) do not have pre-payment penalties.

Both of these statements are generalizations. I’ve financed fixed rate loans without prepayment penalties and vice versa.

Stephanie P. · Answer

It all depends on the lender, the amount of documentation you're able/willing to give, the term and cost.

Many banks don't have a prepayment penalty, but many do.

All of the lenders of commercial loans that are not banks, that I know of, require a prepayment penalty and the penalty varies.

Most commercial construction loans do not require a prepayment penalty because they are expecting to get long term financing to replace the construction financing.

So, like I said, it depends.

Stephanie

Katie Neason · Answer

On my commercial project loans, which are smaller (loans $2MM or less), I never agree to a prepayment penalty. They are typically 5-10 year maturity over a 20-25 year amortization. The only prepayment penalty I have agreed to was for a new construction mixed use building. They underwrote a two year construction loan that automatically rolled into an amortizing loan. It had a prepayment penalty if I refinanced during the first year of the permanent financing. I would ask for them to take it out and get 2-3 more term sheets and compare.

Cason Acor · Answer

Virtually every commercial loan will have a prepayment penalty. I’d be surprised if the bank was willing the drop that, especially on a first time refinance. I’m assuming it’s 5% year 1, 4% year 2, etc? That’s the most common structure. Half a point commitment fee is also normal.