Commercial Mortgage Refinance - Negative Terms

Although there is no iron clad guide on what to terms to avoid on your commercial mortgage refinance, there are a few major items that borrowers should be prepared to deal with. For example, pre-payment penalties, value and or loan to value restrictions, upfront fees and making sure the loan matches your long term over all game plan. Take a gander at below:

 

Prepayment Penalties and Lock Out

Bottom line, virtually all commercial mortgages have some type of prepayment penalties. This fee in the form of a percent of the existing loan amount range from 3% - 10%, and are place on the loan from around 3 to 5 years and as long as 10 years. They are only incurred if the borrower prematurely pays off the loan.

 

Generally, non bank lenders will often have higher prepays, for example, conduit and CMBS lenders. Many conduit lenders often have lock out provisions tied to their loans as well. From the lenders perspective, these fees protect the lenders/investors rate of return. For the borrower these fees can spell disaster as they dramatically reduce owner's options/flexibility with selling or refinancing their properties. It goes without saying that the borrower should match their planned holding period to the prepay.

 

Value and Loan to Value Restrictions

Appraised value coming out lower than expected can seriously alter the terms of a commercial refinance. It is not uncommon to see a difference in rate as high as 1% on the same deal, at 50% loan to value vs. 75% loan to value. The borrower is advised to know what the rate and terms of the loan will look like if the value does come out lower than expected.

 

Besides the rate, will the fixed period be reduced? Will the amortization period be altered? And what about debt coverage ratios restrictions? If the cash flow is tight to begin with, what would happen to the deal/this ratio, if the bank asked to increase the rate and shorten the amortization period? Would it still be fundable? The bank officer should be able to lay this out.

 

Upfront Fees

Let me be clear here. All banks and lenders will require the borrower to pay for the 3rd party reports upfront, but after the loan has reached the first round of preliminary approval. There is no reason why a borrower should have to pay a broker or lender a retainer or good faith deposit. Of course there are exceptions to this and there are very reputable brokers that do charge retainers but the borrower should be very careful with this. For example I am currently working with a doctor that is in the process of purchasing a medical office building that wrote a $16,000 "Good Faith Deposit" to a broker 6 months ago that has done nothing with the deal. The broker was exposed to only despite the check upon approval. It was deposited the day it was received and the doctor can get the broker to return his calls.

 

Long Term Plan

We tend to be conservative with our advice and often recommend longer fixed rate programs for our borrowers. Clearly it is very difficult to know what's going to happen in the future but as many borrowers and our banking system in general is currently experiencing, going with a shorter fixed period loan, out of greed to save 20 or 30 basis points in rate can have a serious impact later on, when the loan adjusts to market.

 

Jeff Rauth is President of Commercial Finance Advisors, Inc out of Birmingham, Michigan. He specializes in Commercial Real Estate Loans between $100,000 - $5,000,000. Offers unique loan programs such as Commercial Second Mortgages, Commercial 30 Year Fixed, 90% non SBA financing, Commercial Equity Loans. Call 248 885 8797 or view Commercial Mortgage Loans or Commercial Loan Calculator