Commercial loan - two year lock in period. How to get out for the next power move!

[Rainier Guiang]

I really appreciate all the great advice given and have learned so much from these forums.  However I have a situation I cant seem to find an answer to.

We were able to acquire a 13000 sq ft commercial multiunit building using a professionals (doctor, lawyer, etc) loan with no money down at less than 5% APR amortized over 30 years. There is a lock in period for two years where we CANNOT pay off the loan or make extra principal payments. After the two years, we can pay off the entire loan with a 3% penalty (of the original loan amount) in year 3, 2% in year 4, and no penalty in year 5. When we bought the property, it was vacant except for our business which took up 3000 of the 13000 sqft. We now have been able to lease out the entire building except for the last 1000 sqft. Because we have added value by finding long term renters (all leases are 5-7 years), the value of the property has gone up dramatically.

So my question, is the following. I would like to refi this building after year two, and remove the debt from our business and put the new refinanced loan under the LLC that owns the building. This would free up my business so I could take out another professional loan for no money down and buy another building. Now I would have to pay the 3% penalty to pay it off in year 3 which comes out to over $60k. But I calculated the added value of putting in those renters in the building at over $1.5 million. So is it worth it to pay the extra $60k through the new refinanced loan in order to go after another no money down building? My instincts say it's worth it. Would you?

Or would you take out the equity from the increased value of the building and use those funds to fund the next acquisition? But this would leave alot debt on the books for our business. Oh the possibilities seem endless... makes my head spin. 

Thanks in advance!

[Bryan Hancock]

In that case from a ROE standpoint your best bet is probably to:

1.  Wait out the lockout period

2.  Refinance during the most expensive prepayment year

3.  Deploy the capital elsewhere

How much equity do you expect to be able to pull out?  You may consider keeping some of it to strengthen your balance sheet too.  This would help you qualify for a new loan easier.  

Assuming you're using the same lender you may even negotiate something with them in trade for waiving part of the prepayment penalty if they finance your next loan.  You won't really know whether or not they'll play ball unless you ask though.  I'm not sure what type of loan you have so it is tough to know who really owns the paper and whether or not the person you think is your lender has the capacity to negotiate these items.