Commercial note refinancing

[Chad Linn]

What are the options/possibilities of refinancing a $900k loan on a 20 unit after first year of ownership and operation?  My goal would be to lock in a lower 25 or 30 year rate.  The property is about $1k per month positive cash-flow.  Assuming the asset life and condition and appraisal will qualify.

[Karen Schimpf]

If you need to use 100% of the appraised value, than typically banks/lenders want you to own the property 24 months.  If you have owned the property less than 24 months,  the lender will use the value  from either the purchase price or percentage of the appraised value.  

For the longer fixed term loans, you typically need to have a loan amount above $1 Million.  

Most conventional commercial loans have a prepayment penalty.  You said you wanted a 25/30 year fixed rate, are you planning on holding it for that length of time?  The reason I ask is if you get a fixed rate for 25/30 years, there is a yield maintenance prepayment on the loan which makes paying off the loan early very expensive due to the type of prepayment penalty.  

The typical term on a commercial loan is where the rate is fixed for either 3 years, 5 years, 7 years or 10 years and amortized over 20 years, 25 years or 30 years.  The most common conventional commercial loan term is the 5 year fixed rate with a 20 year amortization.  If you go with one of these shorter fixed terms, the prepayment penalty is typically a step down.  A step down is if you get a 5 year fixed rate, than there typically is a 5 year step down prepayment  penalty.  So if you decide to pay off the loan the first year of having the note, than you will pay 5%.  If you pay off the loan the second year of having the note, than you pay 4% etc.  

You need to know your goals.  Are your are going to hold the property for 3 years, 5 years up to 30 years?  Once again, the most common conventional commercial loan term is the 5 year fixed rate with a 20 year amortization.