Adjustable rate commercial loans.

[Chris Field]

I'd like to get everyone's thoughts on this topic since I'm no where near an expert on it.

Must if not all commercial loans have an adjustment period, of  between 5-10 years. I'm sure their are others but those are the only ones I have seen. I won't touch a balloon loan after seeing guys lose their shirts and portfolios with them in the last crash.

Having said that we are in a historically low interest rate environment, their is only one direction for rates to go! Is anyone else concerned about this over the next 5-15 years, having large adjustments that would adversely affect cash flow? 

In my own little business I have one for $1m, and I'm in the process of getting another for $1.9m, both are for 5% which is awesome, but both will adjust in 5 years with no cap, and with an amortization period of 25 years their would be 4 adjustments over the life of the loan . My game plan because of this fear, is rapid principle pay down. So when the rate adjust comes in 5 years my principle balances are around half of the original loan amount. I figure if they adjust to say 10% interest at that point I'll still be OK.

I feel these loans are going to cause problems in the commercial real estate world at some point. Am I being irrational?

Thoughts?