Have a few questions regarding a commercial mortgage refinance?
Few are the most typical questions we are asked on a daily
basis.
Timing - will it really take 30 days to close?
No, unfortunately it will probably take longer than 30 day from
start to finish to close your loan. 60 days is really the norm on an
average deal, though 45 days is doable. 30 days is universally under
estimated by banks, lenders and brokers. If someone tells you they
can close your loan in 30, they're either a rookie, or just trying
to tie up your loan. Which of course, is a really poor way to start
off the transaction.
Despite your potential frustration and aggravation on why it
takes so long, it better to just accept the process and be as
diligent as possible in submitting all of the required documentation
from the bank. One of the biggest delays is the borrower's inability
or just plan reluctance to provide the required items. Too often the
borrower feels justified that the bank is just being overly
conservative or to thorough. All this does is simply stalls the
process. Once requested, banks rarely back down from needed
documentation.
What are the fees?
They're actual pretty much the same across the board. There is
normally a 1% bank fee, often lenders will have a processing fee of
approximately $1000, appraisal reports range in cost from $2,000 -
$5,000 (though it's not uncommon to see appraisals more like $10,000
or more on larger, special use properties), title ranges from $800 -
$2000 again depending on the loan amount/state, and a phase one
environmental report will cost around $1,500 - $2,000. Some
properties like multifamily will not normally have environmental
fees or if they do it will be more of an environmental survey which
costs approximately $800.
What can I expect for loan programs?
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It really ranges widely depending on the deal. Amortization
periods range from 15 to 30 years, fixed periods from floating to 30
years, stated income, .8 dcr minimum required, 90% financing, etc.
Also, it pays for the borrower to keep in mind that banks can use
the same loan program but roll it out it different ways. For example
99% of banks offer the SBA 7a loan as a floating product. However,
there are a few that offer this as a 5 year fixed, 25 year
amortization loan.
What is a prepayment penalty, and can I get out of it?
Prepayment penalties are fees that borrowers incurs if they pay
off the loan, either by selling the property or refinancing the
debt, before the agreed upon period. The timing is normally between
3 -5 years with some CMBS lenders going as long out as 10 years. The
fee is almost always in the form of percentage of the loan balance,
i.e. 3 -5% of the loan amount. In other words if the loan amount is
$1,000,000 and the borrower has a 5% pre pay it would cost him
$50,000 to pay off the loan early.
It terms of getting out of it, yes it is possible, though the
pool of lenders that offer this is greatly reduced. It's probably,
and this is a guess, 1 out of a 100 banks or lenders will either
outright waive it or more likely ask for an increase in interest
rate to justify the compromise. And I'm referring to a new loan.
Once in place, you are pretty much stuck (though you could look into
a defeasanse or have another borrower assume your loan). We work
with a bank out of Virginia that commonly waives all prepay's though
their rates are a little high.
What is the application process?
After the borrower agrees to move forward with a bank/lender they
will be asked to fill out an application and provide documentation.
What is normally requested is a personal financial statement, three
years of business and personal tax returns, year to date profit
& loss statements and year to date balance sheets. After a full
"scrub" of the above by underwriting, the lender will normally issue
a term sheet, which itemizes the offer by the bank. Its normally a
couple of pages long, and spells out the bigger issues such as rate,
amortization period, etc and smaller issues with of course includes
a lot of small print protecting the bank. If the borrower wants to
move forward they will need to sign the letter and write a check to
the bank to cover the appraisal, environmental and sometimes a
processing fee.
At this point the loan is officially in process. The lender will
engage an underwriter to thoroughly review the funding request and
will issue a needs list with additional documentation needed beyond
what they already have. The third party reports will also be ordered
at this point. Once the needs list has been satisfied, and all third
party reports are in the bank will officially approve the loan (or
not) and set up a time to close.
It is a good idea for the borrower to be patient and encourage
the bank to be as thorough as possible with their preliminary
underwriting so you do not waste your time and money on third party
reports, as it can be difficult to get a "refund".
248 885-8797 Jeff Rauth is President of
Commercial Finance Advisors, Inc out of Birmingham, Michigan.
He specializes in Commercial Real Estate Loans between
$300,000 - $5,000,000. Offers unique loan programs such as
Commercial Second Mortgages, Commercial 30 Year Fixed and 90%
non SBA financing, and Commercial Equity Lines. 248
885-8797
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