Need help evaluating a Construction Loan ARM for MF

2 Replies

Hi all, 

First time posting here, but long time reader. I truly need help on evaluating a construction loan we have been offered to rehab a 7,000 sq ft school into 6 lofts. The loan would be for 350k. My main concern is that they are offering an ARM/balloon that can have a rate change every 5 years. Is this standard for this type of project. Anyone with experience in this area have any major concerns in taking our this type of loan? Below is the bank reps explanation for the loan. Thank you all for taking the time to respond.

Bank Rep:

Your rate would be fixed at 4.90% for a total of 5 years (1 year interest only for construction followed by 4 years of P&I payments); the 5 year term is based upon the 25 year amortization. Though the initial 5 year term is a ‘balloon' payment at the end, think of it as an ARM. At the end of the 5 years we review things, collect updated financials, and then reprice it out for another 5 years, continuing out over the remaining amortization (which would actually be 21 years left at that point).

That looks like a standard loan for commercial - maximum 5 year term but 20-30 year am.  Pretty cool that you found construction loan for such a low interest rate... I'm looking at a similar sized rehab and was expecting to have to find a hard money lender at 20%+

Hi Christian,

I don't see anything in the bank rep's explanation that looks unusual to me. Essentially its fixed 5 year money with them waiving principal in year one with a reset at year 5 and a 25 year amm. The rate seems reasonable for a combination construction/hold loan.  My bank normally gives me  both 5 and 10 year fixed options with the interest rate higher for 10 year fixed.