Downsides of commercial financing?

Question

Hello BP,
Please consider this our introduction, and thanks for this opportunity. My wife and I are novice investors and have spent the last 5 years honing our property management skills, learning all we can about investing, and repositioning an 8 unit multi-family from a D+/C- property to C+/B- with what we consider good results. Good increase in equity , good cash flow, minimal vacancy factor and management requirements. 
We're looking at leveraging that equity to buy more property, but want to be smart.
The question is this: We've heard horror stories of banks calling notes out of the blue (second hand information for sure, but) or at least not willing to re-up (is this a word?) existing financing at the end of the term. 
Is this something we need to plan for?
What parameters would the (existing/new) lender look for at that time?
Our (commercial - portfolio) note is amortized for 20Yrs, with adjustments every 3 (2pts. max) and a call in 12, and always paid on/ahead of time. The property is an old (by Alaska standards) legally non-conforming property and we know that this can be an issue. It seems that a well performing loan would be the banks interest to keep, but it's always good to be prepared.
Thanks in advance, we've learned as much in the last 2 months of watching BP as in the previous 4 years on our own. What a resource!

Scott Sewell · Answer

Thanks to all for the information. Sorry I didn't respond faster, I'm traveling outside of Anchorage for the next two weeks and connectivity is spotty. Most of the issues noted above shouldn't be a problem. The property has done very well for us and we would have no problem showing the (local) bank good financials and an ever increasing bottom line from it. But i do like the advise about staying in touch with the bank - will do!

Bill Gulley · Answer

Good point Steve, many of the issues will be listed in a note that has a refinancing feature, subject to, those that may have a 10 or 15 year term with a call feature after X months, perhaps annually.

Those that simply "pop" will have the same issues to renew.

And, most banks will be asking for current financials as they are required for audits.

Keep in touch with you lender! It reflects on you as a good business manager and helps build the relationship.

Steve Babiak · Answer

In the commercial lending world, a bank can and will call a loan due for a number of reasons - many of which Bill Gulley has already mentioned.  The loan docs will state SOME of the reasons.

One reason I would add is the borrower's financial status.  The loan might require the borrower to disclose certain financial info to the lender on a regular basis.  If the borrower cannot or does not show financials to the lender, or if the financials are not satisfactory when the lender receives them and reviews, then the lender can (and likely will) call the loan due.

Bill Gulley · Answer

A bank can refuse to renew a loan for a number of reasons.

The best way to manage the risk is to stay in contact with the lender, before any note matures you should get with them and begin the process, like 90 to 45 days prior to the call.

The property being non-conforming will not likely be an issue with the same lender/bank. However, the property needs to be living up to it's expectation of income based on the past. When a new loan is made the bank will look at past rents but may allow you with a better expected income based on other aspects, like your management experience. When you renew the loan you'll be looking at more actual performance.

It will or may be a new loan, so you will need to qualify as well, keep yourself in good shape, debt to income and credit will be viewed again.

When you hear those stories they are usually due to either the property fails or the borrower fails to qualify, rarely is it due to portfolio  issues or regulators unless the loan was not paid as agreed, but it can happen with a troubled bank. That's why you need to communicate with the lender before the note matures. If, for any reason you or the property or the bank can't continue and qualify you will have time to seek other financing. Sleep well and stay in contact with the bank.  :)

Joel Owens · Answer

I am sure the market in Anchorage and Alaska operates very differently from many of the other states.

Who is holding your loan now?? Is it the same bank that originated it??

OR

Was this loan bought in bulk and moved to another bank or did your bank go under and the assets were sold by the FDIC in a shared loss agreement??

Is your bank local, regional, or national?? Is this a CMBS loan??

When you bought did you compensate for the max rate adjustment to see what the cash flow and other metrics would  look like?? For my clients I go out the full value term of the loan even if they are not holding that long and put in conservative assumptions.

So the loan has a call in 12 years. How old is the loan currently from the start date??

Your bank does not have re-up the loan when it comes due. They might not want to loan out on multifamily  assets anymore or they want to divest themselves of their current loans in that asset class altogether. It all depends on how old the bank is and what percentages of loans of what asset class they are holding and how much crud they have on the books currently. A banks monthly deposit volume will show the level of business that location is doing and you can also go on the FDIC site and see banking reports with loans and volumes etc.

How much equity you can pull out will depend on what the evaluation comes back with and what percentages any of your lenders will go to for cashing out. Is there a pre-pay penalty with your loan?? Sometimes you can't pay it off early or make additional payments if you wanted to.

You always plan your exit strategies before even buying the property. You can bring in an equity partner, sell, refi, or payoff the remaining balance when the note comes due.

Brandon Turner · Answer

Bill Gulley (looks like your tag didn't take, Karen M. :) )

Karen Margrave · Answer

Scott Sewell Brandon mentioned Joel, also, @Bill Gulley has ALOT of experience on commercial loans as a lender. Both those guys are good sources.

Brandon Turner · Answer

Good question Scott Sewell and thanks for the introduction! I've not heard of banks calling notes due, because it is a legal contract so they have to abide. However, I am also concerned about the possibility of a bank not renewing a loan and not being able to secure financing. I really don't have a good answer as to how to prevent this - but I'll at least bump this thread to see if anyone else knows. I know Joel Owens is a commercial guy - perhaps he has some experience?