Does a commercial loan usually have repayment penalty?

Question

We are looking at a loan on a 7 unit apartment building including a house on the property.

The bank is saying that a five year resetting rate on the mortgage is normal. Is this true?

Also they are saying there is a prepayment penalty.

Are these normal? This is our first loan that has to be done as a commercial loan.

Alex Bekeza · Answer

I would say the 5,4,3,2,1 is most common on long term loans (10-30 year terms) but by far the worst structure would be yield maintenance rather than a step down.

Will Gaston · Answer

@Alex Bekeza is right. Great point. Yield maintenance is WAY worse. I'm not sure I would sign a loan w/ that requirement.

That's not an issue with the portfolio/commercial loans I do but there are lots of them out there. Be careful about any of these requirements.

Will Gaston · Answer

I have lots of commercial loans and the answer is "sometimes."

Here are the most common ones in my market of Columbia, SC:

1) 5% in paid off in year 1, 4% if paid off in year 2, 3% in year 3, 2% in year 2, 1% in year 1

2) 3% in year 1, 2% in year 2, 1% in year 3 and nothing after that

3) 1% if paid off anytime prior to balloon.

Watch out for #1. Absolutely brutal.

Many banks won't have them and the ones that do may willing to negotiate. Be very careful signing a note with a pre-pay. You never know when you may have to re-fi for other reasons besides rate.

I have paid 50k+ in prepays in the last 3-4 years so I am particularly sensitive to them.

William Costello · Answer

@Luke Lattimer great question, from what I have seen is not always but commonly

Ethan Wagner · Answer

@Luke Lattimera prepayment penalty is very normal.  The 5-yr reset is fairly common, especially with small community banks,  but I wouldn't call that reset "normal".  I would push back for a stepdown prepayment structure (4%, 3%, 3%, 2%,2%,2%, 1%, 1,1%,0%), especially with rates this low you will likely want to go full term until you refi anyways.

Jamie Grubb · Answer

@Luke Lattimer There are different types of lenders and they will have different terms for the loans.  You can find fixed-rate commercial loans for 10+ years, but a majority of commercial loans are floating rates.  I'm guessing here, but your loan is probably <$1m which makes bank financing the most likely for this loan.  Banks are sensitive to interest rate movements and will most likely require 'resetting' after a certain period.

Also, prepayment penalties are common for commercial mortgages.  There are ways that you can 'buy it down' though.  By agreeing to a higher interest rate, you can negotiate a more favorable prepayment penalty.

Peter Nikic · Answer

not always but commonly

Does a commercial loan usually have repayment penalty?

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