Investor · Member since 2018 · 259 posts · 74 votes
Hello!
We are looking to refinance two of our industrial buildings and we are considering using a broker who works with life insurance companies. The terms are very good - 15 year fixed (almost unheard of for these types of buildings), 25 year am, low rates.
We've always worked directly with the bank of choice. We've never used a broker. And we've never gone through insurance. I have some questions for those who have experience:
The prepayment penalty is significant. I'm fine with this since we intend to keep both properties for the long term. Is there any major downside to being "locked in" for 15 years that I might not be seeing?
The fees are slightly lower if we cross collateralize - i.e. use one loan for both properties. The two properties are in different states. But still, I don't really see a downside to this either. It would be harder to sell one of the properties, but it's already a big penalty regardless.
Additionally, if we fund both properties with one loan, it's NON-RECOURSE, vs. if we use two separate loans it's 50% recourse. Non-recourse seems pretty great. But again, I'm not planning on going under water - so is it really that much of an advantage worth the messiness or combining both properties into one loan?
Lastly and MOST IMPORTANT: what do people typically negotiate on these with regards to the fees and terms? The fees are SIGNIFICANT - 1% from the broker and .5% from the insurance co. Plus they are requiring Phase I, ALTA, Seismic, and Appraisal. What can be worked on here?
Any other "standard terms' you like to edit when you do a loan with an insurance co. and / or broker?
Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
6y
1. If you want to cash out refi in the future, you'll have to pay the penalty to do that as well. If rates drop further, you won't be able to refi either. I don't see this as a big risk though.
2. If one property goes under, both are at risk. Also, will you be allowed to substitute collateral or get a release if you decide to sell one?
3. Non-recourse is a huge benefit. No one is "planning to go under water", but it happens.
4. The fee with the broker should have been negotiated prior to him providing you with a lender, so that may be moot. Depending on the loan size, 1% may be rich, but probably not. The 0.5% origination fee from the lender seems decent as well. You do want to be sure that you aren't paying a markup on the third party reports, but those seem standard, depending on the size of the property and location (seismic is often only done in certain areas).
5. There are a lot of terms that are negotiable with life company loans, so you want to get your mortgage broker and attorney to weigh in on this. Depending on which life company you're working with, terms can vary wildly. I spent a good portion of the last downturn servicing defaulted life company loans, and even with the same lender had very different results based on how well the loan docs were negotiated.
Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
6y
1. If you want to cash out refi in the future, you'll have to pay the penalty to do that as well. If rates drop further, you won't be able to refi either. I don't see this as a big risk though.
2. If one property goes under, both are at risk. Also, will you be allowed to substitute collateral or get a release if you decide to sell one?
3. Non-recourse is a huge benefit. No one is "planning to go under water", but it happens.
4. The fee with the broker should have been negotiated prior to him providing you with a lender, so that may be moot. Depending on the loan size, 1% may be rich, but probably not. The 0.5% origination fee from the lender seems decent as well. You do want to be sure that you aren't paying a markup on the third party reports, but those seem standard, depending on the size of the property and location (seismic is often only done in certain areas).
5. There are a lot of terms that are negotiable with life company loans, so you want to get your mortgage broker and attorney to weigh in on this. Depending on which life company you're working with, terms can vary wildly. I spent a good portion of the last downturn servicing defaulted life company loans, and even with the same lender had very different results based on how well the loan docs were negotiated.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
6y
Life companies tend to be picky on asset location and type with lower leverage requirements and higher borrower net worth requirements.
If you fit into their box their rates can be hard to beat. Local banks have more a short term money outlook due to their business model versus insurance companies.
Investor · Member since 2018 · 259 posts · 74 votes
6y
@Joseph Cacciapaglia Thanks Joseph, that was super helpful. Yes there is a release provision.
Regarding the fee, the loan fee on our last loan was 0.5% of the loan amount, so 1.5% is hard to swallow. But I get there are more people involved. I guess I'll just have to see how it compares to the terms from our direct bank and see who wins.
Investor · Member since 2018 · 259 posts · 74 votes
6y
@Joel Owens Got it thanks. They've already requested financial data and vetted against 9 lenders and provided actual term sheets, so I think we meet the criteria... You think it's worth the 1.5% fee? We paid 0.5% on our last deal.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
6y
If the mortgage broker can actually get you incredible terms not offered anywhere else the fee might be worth it.
I have clients on transactions pay me more money as a commercial real estate broker than what is being offered by the seller sometimes as I have a minimum fee I want to work for or I turn down the business. I only have so much time in the day and will only commit for the right client and terms to me.
I have found when terms are incredible either that mortgage broker has a rare contact being aggressive in the market (it happens) or they are promising the world and taking up front fees. They also could know the lender is doing a teaser rate and will not lock until up to closing or change the rate after borrower is very deep in costs to them so won't want to change.
You might want a (claw back) agreement with your mortgage broker that says in the event the financing rate and terms are not given and funded by the lender exactly as stated upfront that the fee paid out drops from 1.5% to .5% or something similar. Also make sure that any part of that fee is ONLY paid at closing and not before. There are some mortgage people that just take fees knowing lender will re-trade or not loan at all. If they know they get nothing until closing it tends to weed out the non-performer mortgage brokers.
Additionally ask how long the mortgage broker has been in the business in years? Do they own their mortgage company? If not how many companies have they worked for over what period of time? How many loans have they closed with this insurance company before? Did the insurance company perform in the timeline given on the other loans or delayed and ran up high costs? Does the mortgage broker have other clients they have closed loans with as references you can speak to?
They might say clients are private blah, blah, blah BUT if client gives permission you can still contact them. Most of my potential clients don't ask me for references because of my demonstrated knowledge and track record over time but those that do I have tons of references. I just have to check with my clients as some are more private than others.
Example some will do a video testimonial for me, some picture testimonial, other will allow a case study, others will not do any of that but happy to talk over the phone as a reference, and others won't do anything. I have had clients in weapons defense that have had to remain very private because of the nature of their work etc. So it varies across the board.
1/2 a point fee is low unless the property is a very big mortgage. On my commercial retail deals typical is 1% by a capital markets mortgage broker unless under 1 million loan than 10k minimum fee to them. I do see the points drop as loans go into 7,10 million and up etc. The loan is so large on a say a 30 million loan that they can still make a good chunk without getting 1% or more.
If this insurance company only lends out so much annually , has a great relationship with your mortgage broker,etc. then the fee may be justified.
Someone might pay me 30k more as an example but if that lands them into a great property with long term value versus buying a dud where they lose equity down payment then it really isn't a cost but a benefit in the long term.
Pay attention to if the mortgage broker will be paid on all deals going forward with this lender and for how long because of the introduction to them. Mortgage brokers like to slip those agreements in with their clients.
Thank you so much for this information. This was incredibly helpful in this process. Really appreciate you taking the time to give us your valuable first hand experience. So much more helpful than anything you could read in a book, etc.
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y
Interesting, I usually see insurance money on larger deals (surety of return and easier to manage the portfolio), anyways:
The prepayment penalty is significant. I'm fine with this since we intend to keep both properties for the long term. Is there any major downside to being "locked in" for 15 years that I might not be seeing?
I think the biggest deal would be getting cash out and if they allow subordinate debt. Is the debt assumable if you need to sell?
The fees are slightly lower if we cross collateralize - i.e. use one loan for both properties. The two properties are in different states. But still, I don't really see a downside to this either. It would be harder to sell one of the properties, but it's already a big penalty regardless.
Well, non-recourse is always preferable, but if it's limited to just the 2 properties, I don't have too much a problem. The only issue is if one is waaaaaaaay more income and it becomes empty for an extended period.
Additionally, if we fund both properties with one loan, it's NON-RECOURSE, vs. if we use two separate loans it's 50% recourse. Non-recourse seems pretty great. But again, I'm not planning on going underwater - so is it really that much of an advantage worth the messiness or combining both properties into one loan?
What's 50% recourse mean exactly?
Lastly and MOST IMPORTANT: what do people typically negotiate on these with regards to the fees and terms? The fees are SIGNIFICANT - 1% from the broker and .5% from the insurance co. Plus they are requiring Phase I, ALTA, Seismic, and Appraisal. What can be worked on here?
Most of that is dependent on the lender I think the GeoTech and Phase I are pretty standard for agency debt (like FNMA or FMAC) and I don't have heartburn over that. Did you get ext title when you bought it? There should be an ALTA survey then, I'd think? An appraisal is the way it is - Lenders are protecting their interest using a dis-interested 3rd party.
Any other "standard terms' you like to edit when you do a loan with an insurance co. and / or broker?
The lender gets to dictate terms and their negotiability. Make sure you get your obligations in writing (esp WRT default items) and UNDERSTAND BEFORE YOU SIGN.
