Commercial Loan questions - Amortization and Balloon.

9 Replies

Newbie to the forums, had questions about commercial loans.

For a commercial loans I understand they vary upon what lenders are willing to lend, but are there certain advantages to structuring the loan a certain way? (Amortized over 20 vs 30 years or balloon at 5 vs 10 years?). Aside from what the lender is willing to lend is this just borrower preference or is there certain strategies to picking a certain amortization schedule and ballon payment date? If so, do strategies differ based on niche of investment (Multifamily vs retail)?

Or is it simply try to borrow with the longest amortization schedule and furthest ballon date possible to maximize cash returns?

@Grant Gaffney if the lender is offering options then they do not have a preference. 

Each option will be priced differently in terms of points and interest cost so it’s up to you.

Multi family properties are the only type of commercial that you can get 30-40 year amortization and lower down payments. Retail and other types of commercial loans will be 20 years or less and typically require 30%-40% down depending on the asset and borrower. Sometimes less but this is the standard.


If you are holding long term you’ll want long term loan which will optimize cashflow. 

I wanted to expand on retail properties for lending.

There is a vast difference between STNL ( Single tenant net lease) and MTNL (Multi tenant net lease) properties.

Single tenant you have just one income stream for the property and multi tenant you tend to have various businesses categories propping up the cash flow to service the debt. If a single tenant goes out you have break occupancy being negative as no income is coming into the property whereas with a retail center break even occupancy might be 65% after the down payment. So in that case you might could still cover the existing mortgage with the cashflow until you release the vacant spaces. So properties have different underwriting models based on credit tenant type, stnl or mtnl, how many primary years left on the lease, lease staggering, termination clauses, co-tenancy clauses, restrictive use clauses, lease guarantees for personal and corporate, disclosure of ongoing sales, association by laws, etc. 

STNL typical is 30% to 35% down minimum with  a max 25 year amortization  schedule fixed for max 12 years.

MTNL 25% down minimum to 35%. Up to 10 years fixed rate around 4.5% for high quality assets and 25 to 30 year amortization. I am talking properties in the many millions in price not the sub 1 million mom and pop type stuff. That tends to be local banks that want to fund that and plan on maybe 5 year fixed with 20 year amortization and current interest rates in the 5's. You have to get that small ball stuff at really high cap rates to maintain the 100 basis points more cost on the debt for good spreads and cash flow.    

Originally posted by @Grant Gaffney :

Newbie to the forums, had questions about commercial loans.

For a commercial loans I understand they vary upon what lenders are willing to lend, but are there certain advantages to structuring the loan a certain way? (Amortized over 20 vs 30 years or balloon at 5 vs 10 years?). Aside from what the lender is willing to lend is this just borrower preference or is there certain strategies to picking a certain amortization schedule and ballon payment date? If so, do strategies differ based on niche of investment (Multifamily vs retail)?

Or is it simply try to borrow with the longest amortization schedule and furthest ballon date possible to maximize cash returns?

If you model the cash flow, you can factor in market conditions and timing of the leases for expiration. I.e. don't have a loan due 1 year after large tenant doesn't renew. You want to have time and options in all scenarios.

 

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My previous post was deleted due to self promotion. So, I will make this clear. CMBS is a very homogeneous product. Sometimes, there can literally be no difference in structure and/or rate between two CMBS lenders. So, the below applies in general to CMBS structure, not just to my bank.

Chiming in from a CMBS perspective as it is one of the biggest providers of long term debt. While some banks might charge more in coupon for 10 year fixed vs 5 or 7 year fixed, for CMBS it is flipped. The 10 year fixed is cheaper than a 5 or 7 year fixed. In terms of amortization, CMBS can offer 30 years for all product types (including single tenant retail). For hotels, 25 year amort is slowly becoming the norm though 30 years is still possible depending on the flag. In my experience, while a multitude of scenarios are often presented, borrowers typically chose a product based on their business plan. Some risk averse borrowers who would rather pay down debt faster would even chose 20 or 25 year amort even when a 30 year option is on the table.

CMBS is kind of a last resort these days for my buyers.

Used to regular lenders offered 3 years fixed to only 5 years at the commercial real estate recovery many years ago. Now there are lots of regular lenders who do 10 year fixed and legal costs are much less than CMBS. CMBS can be good on really big properties in the tens of millions in price where regular lenders do not want to do that high of a loan (concentrated risk) on one property.

Regular lenders either pass those properties up all together or they partner up taking on certain tranches of debt to do the deal so there is spread out risk among many parties for smaller percentages.

CMBS properties are harder to sell unless you hold for full term of loan. Have one right now buyer might assume and small purchase price of around 3 million there is about a 300k prepay penalty on the loan. Assumptions can be more difficult and CMBS tries to stick it to the buyers.

CMBS since typically only recourse is the property imposes hefty lockbox reserve accounts with cash sweeps. So money gets trapped and just sits there.

Tons of other lenders sub 10 million in price point properties that can match or beat CMBS with less onerous terms.

Originally posted by @Joel Owens :

CMBS is kind of a last resort these days for my buyers.

Used to regular lenders offered 3 years fixed to only 5 years at the commercial real estate recovery many years ago. Now there are lots of regular lenders who do 10 year fixed and legal costs are much less than CMBS. CMBS can be good on really big properties in the tens of millions in price where regular lenders do not want to do that high of a loan (concentrated risk) on one property.

Regular lenders either pass those properties up all together or they partner up taking on certain tranches of debt to do the deal so there is spread out risk among many parties for smaller percentages.

CMBS properties are harder to sell unless you hold for full term of loan. Have one right now buyer might assume and small purchase price of around 3 million there is about a 300k prepay penalty on the loan. Assumptions can be more difficult and CMBS tries to stick it to the buyers.

CMBS since typically only recourse is the property imposes hefty lockbox reserve accounts with cash sweeps. So money gets trapped and just sits there.

Tons of other lenders sub 10 million in price point properties that can match or beat CMBS with less onerous terms.

 

I agree that CMBS is a good fit for properties that need bigger loan amounts. My average loan amount is $35MM. I will always tell my borrowers that CMBS has pros and cons and its only a fit for borrowers that has a particular business plan. And even with the decrease in market share now to 15% from as high as 50%, CMBS is still an an option and has not disappeared completely because of the lack of financing sources that offer a 10 year loan term, fixed rate, 30 year amort, non recourse (which is huge) and certain interest only periods (which is also a trademark CMBS feature) and also CMBS is willing to lend in secondary and even tertiary markets. If there are enough financing sources offering those terms for product types like hotels (which many balance sheet lenders steer away from) particularly at the $20MM+ tier, then CMBS will not exist. For borrowers that need small loan amounts ($1.5MM or so), a small balance CMBS loan will be a fit where the closing costs are capped.

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