All Forum Posts by: Tim Milazzo

Hi Jason,

 The prepayment penalty for a given commercial loan is typically negotiated at the front end. That said, here are some typical structures:

- "Yield Maintenance" - when you prepay, the lender calculates the net present value of the interest they would have received of you held the loan to maturity, maintaining their yield/profit from the loan.

- "Declining" - the lender agrees to a simple schedule of prepayment penalties, often stated year by year. So for a 5 year loan, the schedule might be 5,4,3,2,1, with a few months at the end of the loan where there is no penalty.

- "Lockout" - it's impossible to prepay. This would more commonly be a period early in the loan, rather than the whole term.

- No penalty - there are lenders out there with good rates and no prepay penalties as well.

There's also "Defeasance" which is used to prepay a CMBS loan, but explaining that one would be a longer subject.

@Jason Turgeon - yes, planning for the length of the loan commitment and then evaluating opportunities to sell or refinance are pretty much exactly how all of commercial real estate investing works. 5 or 7 year terms are common for smaller local deals. Larger, stabilized properties will often have the option to do a 10 year fixed loan as well, and top of the line product with great tenants may have access to longer term fixed rates from insurance companies. But 5, 7, 10 are considered standard.

A good office leasing broker can talk to you more about the strategy on the revenue side, but typically you build in step-ups, called Escalations, to the lease rates over longer periods. Often you may give the tenant an Option to renew, where they tell you a certain amount of months ahead of time whether they'll stick around, so you have time to plan for a new tenant if they move out. That option may allow them to stay at some pre-negotiated new rate that is higher.

The worst thing you can have is a vacant building when it comes time to refinance. The second worst thing you can have is a building full of tenants of questionable ability to pay, and no commitment to stay anyway, so it can become vacant in a hurry. The third worst thing you can have is a building full of happy, stable tenants who are locked into below market rates and no way to raise them contractually.

Solid input from others except... those are not great assumptions given on a commercial mortgage.

No, typical commercial mortgage rates (from banks) are not yet 6%+ as of this writing. Private money or debt funds can be 6-9%, but we're still getting rates from banks in the high 4s to high 5s if the investment is solid. Lender perspective:

1. Small market and small property mean local banks/credit unions are the best candidates.

2. You mention 7/10 units occupied. Next question: when do the leases expire? If all the leases are going to roll within a couple of years, the downside risk is a vacant office property, in an area that may not have high demand. That could be a deal-killer, especially if you don't showcase a solid business plan and some experience with the area/asset class.

3. Assuming the rent roll has staggered leases, and you have solid financials, we're in decent shape. This isn't a 4.X% market, but something in the 5's should be possible.

75% leverage is probably a little bit high, maybe a local bank does 65-70% leverage, 5 or 7 year term with a 20-25 year amortization. 15 year amortization on office property with strong cash flow would be brutal.

@Yia Vang - it's a bad strategy to get a commercial loan on a few units if you're going to be living in one, because:

1. Commercial loans have a minimum income requirement, called the Debt Service Coverage Ratio (DSCR). If you're not paying yourself rent through another entity, your income may not meet the requirement.

2. Commercial loans typically have higher rates for small investments for inexperienced borrowers.

3. Pair this with lower leverage, especially if you're living in one unit, so you'll need a larger down payment.

4. You'll most often see a prepayment penalty, so it's not as readily exited as a residential mortgage.

Stick with the 4-plex and the resi mortgage unless you're going after 10+ units and don't plan on living in it.

Wow, why so much misinformation from people saying that fixed rate commercial loans are rare? I'm an intermediary, we've done 28 loans in the last year+, and literally every single one has been fixed rate. Let's stick to talking about what we know well people.

@Tony F. - you've also gotten some people giving you truth here, just to sum up/clarify:

1. If the loan size >$1 Million, occupancy > 90%, and your personal financials are strong, you may qualify for an Agency loan with Fannie Mae or Freddie Mac. Fixed rates up to 10 years, 30 year amortization.

2. Many banks and credit unions do fixed rates of 5 or 7 years (20-25 year amortization), and some do 10 years. If your bank doesn't do it, you're with the wrong bank. Yes, an intermediary can get banks to compete for you, typically for 1% of the loan amount.

3. There are Life Insurance Companies that offer commercial mortgages with fixed rates *longer* than 10 years, but the requirements are more stringent and they are less aggressive on LTV in general. You'll usually also need to go through an intermediary to access a product like that.

Are fixed rate loans more expensive on a current interest rate perspective? Usually yes. But in a rising interest rate environment, the benefits are obvious.

Hi JC,

 Congrats on getting into your first commercial deal. You mention it is a 15k sqft building. What type of building? Office? Retail?

 You're really unlikely to get a good bank loan to rehab this building. There are a lot of bridge lenders out there, but you won't want to lead the conversation talking about your lack of experience. If there's not much value in the property itself and you're asking for funds to put into it, in essence the lender will be investing in you.

 Step 1: Have a solid and compelling plan for the building. Have a pro forma budget that shows the capital you will put in, and the resulting financials of the building that you're expecting. It needs to be professional. If that's above your current capability, team up with someone.

 Step 2: Identify the right lenders, and pitch them on the deal in the way they need to hear it. Again, this is somewhere you'll need to be buttoned up - commercial mortgage brokerage firms (full disclosure, I own one) exist for this reason. The lender will open up the pro forma, deal summary, and your finances to see if it appeals to them. 

 Result: strong rehab projects at reasonable leverage can fetch a bridge loan with the high single digit rate, interest-only payments, and a couple points up front. The idea is to complete the renovations, get it filled up with tenants, and then refinance to a lower rate lender.

Alexander is right. 3% down on a commercial multifamily loan is not real. For commercial (5+ units), you're looking at 20-30% equity.

@Brian B. - you definitely don't need to take a loan on multifamily with 15 year amortization. As mentioned further up, 20 - 25 years amortization is common from local community banks. Going the small-balance agency route would get you 30 year amortization, but I'm not sure if your loan will be over $1 Million?

Some more explanation of all the multifamily permanent loan options: https://www.biggerpockets.com/blogs/9562/72944-all-the-multifamily-perm-loan-options

Hi @Travis Salley,

 Not a great goal if you'd like to stay independent (no equity partners). Your two most obvious options are:

• Reduce your investment size - No way $100k nets you a $1 Million property alone. Think $400k, and you'll need to get a community bank on board with 75% leverage (which is actually aggressive for most community banks), and 25 year amortization. It will take talking to a lot of community banks if you don't have additional funds to showcase liquidity reserves and a higher net worth, as the loan will be full recourse.
• Partner up - combine your equity with a couple other investors to have 30% equity ready for that $1 Million property.

 - Tim

Hi Zach,

Welcome to the Commercial side of real estate! Every multifamily property 5 units and up will need a commercial loan, and there are several differences vs a residential mortgage:

• Larger down-payment required - there are programs that lend up to 80% in multifamily (Fannie Mae and Freddie Mac both do this), but with a loan size of less than $1,000,000, it's uncommon. I'd bet on a 25-30% equity requirement if you're going with a typical community bank program, rather than 20%.
• Amortization on the loan for a new multifamily investor could come back quoted at 20-25 years, though the loan term (when the balloon payment is due) would more likely be 5 or 7 years. There are definitely 10 year terms available from the right banks, but trying to negotiate 10 years with a bank that can only quote 5-7 is fruitless. It's about finding the right lender (and there are many).
• If they like the property's financials, banks will also underwrite your financial strength, and want to see net worth and liquidity that will protect their loan principal. Most community banks will lend full recourse, meaning you're on the hook for the full loan amount if you default (after the bank takes back the property that is).

Let me know if you have any other specific questions, happy to help.