Refi from a personal into a 30 yr fixed non-recourse Commercial?

Question

Question about how to refinance your personal loan into a fixed rate 30 year commercial loan so it doesn't show up as personal debt. I have (2) commercial loans right now.

Commercial Loan 1: has (3) houses on one lot. It's structured in a 15 yr balloon on a 20 year am schedule that doesn't show up on my personal debt. It shows up in the LLC's debt but the LLC is the pass through entity and I show the income.

Commercial Loan 2: (2) houses on one lot ; its in my personal name and shows up as debt with similar structure.

There is where I need clarification: I know there are fixed rate 30 year commercial loans now. Do they have to be non recourse so they don't show up as debt? Does "Personal gaurentee" always show up as debt?  Other options?

Reason: I'm building two houses to be used as short term rentals in a 4 season resort area. The lender informed me I might be able to get them into a 30 year fixed rate commercial loan with an LLC as the pass through so they wouldn't show up on my "Debt to income ratio" (DTI). (He doesn't offer it) The LLC will carry the debt and I'll show the income as a pass through the "LLC" and in turn it would open up a few hundred thousand for more future deal(s).

Erik W. · Answer

@Aaron Foster,

Non-recourse, 30 year, fixed-rate notes are typically those backed by Fannie Mae and/or some other Govt agencies for large projects.  Think $1 million and up for apartment complexes.  Might be able to get some smaller ones, but that's what I typically see.  Also, maximum 75% LTV and debt coverage ratio requirements.

If you're just building a couple of houses--unless they are very high $$$--my guess is your project won't qualify.

Local, community banks often make commercial loans that they portfolio in house and often do not report to credit agencies (unless you stop paying and get sued).  They will want you to sign a personal guarantee, though.  There won't be any "LLC is carrying this debt" stuff.

Lenders won't typically lend to LLCs.  It makes sense why they won't.  They know an LLC can liquidate its assets and disappear over night and there's no one to collect from.  If you were a lender, you wouldn't make a loan like that, right?  Same reason no one else will.

The big boy lenders like the fixed-rate commercial loans discussed above are non-recourse because of the strength/value of the asset itself.  Foreclosures are costly and the value of the property can quickly plunge to the point where the bank loses money.  That's why they won't mess with anything small.  A $1,000,000+ asset with a max LTV of $750,000 though should still have at least $1/4 million in equity they can use to cover their losses from the foreclosure.  Again, logically this makes sense.  It costs about the same amount for an attorney to foreclose a $50,000 property as it does for a $1,000,000 property.  If the fee is $10,000 either way, the bank takes a blood bath on the $50K house....but they come out okay on the property with $1/4 million in equity.  That's why they can do non-recourse on big deals, but not small deals.  I'm spit-wadding those foreclosure costs and it may costs somewhat more for a big commercial deal, btw....but you get the idea: there's a ton of wiggle room in a big deal but not so much in small deals.

Without knowing how big your project is, my guess is probably what you'll end up looking at is a local bank to do an in-house portfolio loan.  Odds are you won't get a non-recourse (unfortunately) loan, and you're probably looking at a 5/1 ARMs and/or balloon.  It likely won't show up on your credit report, but you will be signed on it personally.

I did luck out and find one local bank that's doing up to 30-year fixed rate, no balloon commercial loans at 5% locally, but I'm personally signed on them.  They aren't reported to credit bureaus.  They're making these to build up investor clientele.  Kind of a rare find and I'm getting a lot of my commercial variable rate loans switched over to them.  You might ask around if there are any banks looking to build up their portfolio and see what you find.

Good luck!  Tell us more about your project.

Tarik Turner · Answer

It can be a full recourse loan but a non reporting loan... the two are not tied together