Need help evaluating a Construction Loan ARM for MF

[Christian DenOuden]

Hi all, 

First time posting here, but long time reader. I truly need help on evaluating a construction loan we have been offered to rehab a 7,000 sq ft school into 6 lofts. The loan would be for 350k. My main concern is that they are offering an ARM/balloon that can have a rate change every 5 years. Is this standard for this type of project. Anyone with experience in this area have any major concerns in taking our this type of loan? Below is the bank reps explanation for the loan. Thank you all for taking the time to respond.

Bank Rep:

Your rate would be fixed at 4.90% for a total of 5 years (1 year interest only for construction followed by 4 years of P&I payments); the 5 year term is based upon the 25 year amortization. Though the initial 5 year term is a ‘balloon' payment at the end, think of it as an ARM. At the end of the 5 years we review things, collect updated financials, and then reprice it out for another 5 years, continuing out over the remaining amortization (which would actually be 21 years left at that point).