Fully amoritzing vs balloon commercial loan

6 Replies

Hello investors,

I was listening to real estate guys podcast the other day and a commercial lender/broker mentioned about a fully amortizing 25, 30, 35 yr term HUD FHA commercial loan product. Anyone knows if such a product exists in today's market and if so where/who should I start talking to about this. Having a loan that is going to come due in the next 5, 6, 7..years doesnt give me the warm and fuzzies.



@Prashant Sharma

HUD multifamily products are for $2,000,000 to $100,000,000 or more.

Any lender can do a regular commercial loan product up to 30 years, but there is a lot of risk in doing so because they keep commercial loans on their balance sheets. You'll have to pay higher interest rates that usually don't make it worth it.

@Prashant Sharma

You're not going to find a loan for a commercial asset longer than 10 years with a bank. As Christopher mentioned, the risk of fixing a rate for an extended period of time too much for them. Life insurance companies can go out 15, 20 and 25 years but they're typically looking for low leverage deals, strong borrowers and loans above $5mm. I correspond to a few that do $1mm+ (Symetra, Stancorp et al).

The 223(f) program you're talking about still exists but is strictly a multifamily product. Its a great option, if you're willing to go through an arduous 6-9 month closing process. They're almost entirely utilized for refinances because of this closing time frame but the terms are unbeatable. 85% LTV - 35 year term fully amortized - fixed rate in the mid 4%'s.

Fannie Mae multifamily loans (5+ units) start at $1mm and can go 5, 10, 15, 20, 25, and 30 years with a 30 year amortization. They're able to offer longer terms because they are securitized as a single asset mortgage backed security. Freddie Mac also has a great small balance program but are limited to a 5, 7, or 10 year term because they pool multiple loans into large securitizations or "K-deals" (https://mf.freddiemac.com/investors/k-deals.html). Buyers of MBS like the diversity Freddie offers, but some prefer the longer investment horizon offered by Fannie.

I agree with Conor for the most part. What most buyers do not fully understand is the finance option part of commercial real estate and how that affects returns.

With commercial retail most you will usually see is 10 year fixed terms with a 25 to 30 year amort.

Even life insurance does not usually want to go out longer than that. Even if they do the property doesn't work anymore.

Example you buy a center at a 6.8 cap and get debt in 4's. You want 15 or 20 year debt and now the quote is 100 basis points higher on the rate (high 5's). Now the DSCR ratios and everything else is too thin to pass underwriting criteria. I have found 10 years fixed is plenty of time to move with the economic cycles. Pay special attention with loans to prepay penalties and how much you can pay down over time to mitigate refinance and interest rate risk.

On the large multifamily side I do not know anyone that holds a property for 30 years. It is a very tiny percentage. Most people that buy property sell within 5 to 10 years of owning it in the commercial space. Many owners are funds, REIT's, syndicates that have certain investment time windows of the asset. A benefit to check on with long term locked debt for 20 to 30 years is if your future buyer can assume the loan. If you can get it you want 2 assumption times for the loan. One when your buyer purchases it from you and one remaining when your buyer sells off to someone else. In a future rising interest rate environment having a long term loan that can be assumable at a low rate can be a plus.

The downside for a buyer is typically the equity down to assume the loan is much more required than placing a new loan at a higher ltv. You could stack the debt though as a possible solution.  

I agree with @Joel Owens  , especially about the percentage of borrowers who utilize longer term debt vs. 5-10 year terms and the benefits of having an assumable loan. But we are seeing LifeCo's issuing loans longer term - here's what we've closed with one of our LifeCo's, in the last 6 months:

  • 17 year term / 17 year am - 4.90 % Fixed - NNN credit retail tenant - 2.2mm loan - 70% LTV- Chicago IL
  • 15 year term / 25 year am - 5.16% Fixed - NNN credit retail tenant - $1.2mm loan 50% LTV Kingsport TN
  • 20 year term / 25 year am - 4.10% Fixed - Multifamily - $950k - 63% LTV - Gainesville Fl.
  • 20 year term / 20 year am - 4.30% fixed - Unanchored Strip retail - $2.3mm - 70% LTV - Phoenix AZ

To your point, these terms don't fit with your average investor's business plan, but they are available out there and I think that's what Prashant was asking.

@Prashant Sharma

Hi Prashant,

Most agency debt and CMBS debt have 10 year terms. HUD loans do have 35 year terms, but it is a long process to close a loan, at least six months, and they can be laborious. You are dealing with the govt. Make sure to read the fine print. You can only take owner draws twice per year and they want to audit your books. It is a terrific product if you have the right asset, patience and are willing to adhere to their rules


Thanks for your replies, very helpful!

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