Hi BP Community - I would greatly appreciate feedback on the following loan terms from a local bank. It's an 8 unit apartment building. I don't see anything that stands out except for the personal guarantee. I would think this thing could stand on its own without a personal guarantee. Is that typical for a deal like this or of this size maybe? How do the rest of the terms look? This is our first commercial loan so I'm just being cautious. Thanks much!
Loan terms and final items needed would be as follows:
· Loan to Your LLC , in the amount of $292,000.
· Rate locked for 5 years at 4.0%.
· 5 year term, 20 year amortization of loan amount.
· There is a 2% refinance penalty if the loan is refinanced to another bank during the 5 year term of the loan. This does not apply to prepayment of principal by you as the owners or if sold or if refinanced by the bank.
· Collateral will be a 1st lien mortgage and GBSA on the real estate and personal property being purchased, respectively. We will also file an Assignment of Rents too.
· Personal Guarantees from you and your wife as Members of the LLC will be required.
· Estimated loan closing costs are about $1410 and include the following
§ Loan origination fee of $500
§ Property valuation $300
§ Title commitment fee $400
§ Recording fees $60
§ Tax service, flood and UCC filing $150
· I will need an operating agreement if you will both be members of the LLC
· I will need a copy of the IRS tax ID letter, assigning the employer Identification number to the LLC.
· I will need copies of your Drivers Licenses for our file
· As I mentioned, there is no formal Business Loan Agreement on smaller business loans, although we do request that you provide your tax returns and an updated Personal Financial Statement annually.
@Herb Lichtenberg I bought a 10 unit last year with a partner at $910,000 and went through a similar scenario. If it had been over $1 million I most likely would have been able to get agency financing with fannie/freddie and a non recourse loan. Of course, in agency financing, they collect one year in escrow for payments, insurance and taxes. So, I looked at it as a decent outcome. Will most likely sell before 5 years and I have no prepayment penalty
@Herb Lichtenberg the terms look fairly similar to what I've been hearing from a few lenders for the same asset class/type. I also struggled with the whole personal guarantee requirement, but seems to be the norm for smaller apt buildings. Ultimately for a commercial deal, which yours is, the cash flows and debt service metrics should be the factors carrying most weight. As long as you have enough assets or worth in case things do go wrong, the bank will feel that much more comfortable with you being the guarantor behind the operation.
@Kim Meredith Hampton Thank you for your feedback Kim!
@Arturo Herrera Thanks Arturo!