Multifamily Lending question

[Joseph Medina]

Hey Guys, its been a while since I have been on (almost a year). Its been a fun ride. my wife and i bought an off market deal, and all it required is a value add situation. SOOOO, naturally I learned how to do tile, flooring, concerete, and electrical work, and other misc things. here in a few months we are going to have our primary re-appraised and we are expecting double (hopefully). And i want to take our equity and partner up with another investor friend of mine and buy a 10-15 unit appartment building . 

My question lies in the financing. 

From what i have read and understood when you get a commercial loan, lets say for example, a 25 year fixed rate at 'XYZ' interest rate with a 7 year balloon payment. 

Okay, so when the 7 years is up you pay back the principal and interest of the original loan, and your goal is refi into another loan, i am assuming its going to be another commercial loan with a similar baloon payment, right? and of course i am assuming the terms are lender dependant. 

i guess the question i should be asking is am i always going to be bouncing from baloon to baloon? (if that makes sense) 

[Account Closed]

Commercial loans are typically amortized over 20+/- years and will have a 5-year term where the interest is fixed. At 5-years, the interest rate adjusts to a new rate based on the prime, SOFR or whatever. Your original loan documents will outline the conditions of this reset ceiling, and should be negotiated up front. For example, the renewal may reset to prime plus 300 basis points. This would be large increase for someone who’s original fixed rate was 4%, but now would jump to our current prime plus 3%. It would have been better to have negotiated the renewal cap to 150-175 bps. Another condition you may see is a floor rate meaning your reset interest rate cannot go below that of the first term. For example, you might get a 5-year term at 6%. Then a recession hits and the fed drops prime to 0%. Your reset would still be 6%, while everyone else is getting 3%. You should negotiate to have this condition removed. 

I agree with @Caroline Gerardo in that shopping for a new loan is really expensive, so getting into a term loan with reasonable resets is a good idea, in my opinion.