Commercial loan - two year lock in period. How to get out for the next power move!

10 Replies

I really appreciate all the great advice given and have learned so much from these forums.  However I have a situation I cant seem to find an answer to.

We were able to acquire a 13000 sq ft commercial multiunit building using a professionals (doctor, lawyer, etc) loan with no money down at less than 5% APR amortized over 30 years. There is a lock in period for two years where we CANNOT pay off the loan or make extra principal payments. After the two years, we can pay off the entire loan with a 3% penalty (of the original loan amount) in year 3, 2% in year 4, and no penalty in year 5. When we bought the property, it was vacant except for our business which took up 3000 of the 13000 sqft. We now have been able to lease out the entire building except for the last 1000 sqft. Because we have added value by finding long term renters (all leases are 5-7 years), the value of the property has gone up dramatically.

So my question, is the following. I would like to refi this building after year two, and remove the debt from our business and put the new refinanced loan under the LLC that owns the building. This would free up my business so I could take out another professional loan for no money down and buy another building. Now I would have to pay the 3% penalty to pay it off in year 3 which comes out to over $60k. But I calculated the added value of putting in those renters in the building at over $1.5 million. So is it worth it to pay the extra $60k through the new refinanced loan in order to go after another no money down building? My instincts say it's worth it. Would you?

Or would you take out the equity from the increased value of the building and use those funds to fund the next acquisition? But this would leave alot debt on the books for our business. Oh the possibilities seem endless... makes my head spin. 

Thanks in advance!

After reading this it makes my mind spin. I've been trying to figure out which bank I can use to do no money down. If you don't mind me asking which bank did you use? And what was the process like?

Also, at what LTV is the bank going to refi? I believe if it's worth going for into the next acquisition than go for it. If it doesn't hurt much. Free up your business for more acquisitions, and bigger profits.


Caleb Charles


@Caleb Charles  Hi Caleb, we used B of A.  They have a practice solutions program for physicians.  The loan had to be personally guaranteed against our business and our homes though.  Hope this helps.  I know Wells Fargo has another program similar to it as well.  

Who is "we"?  We as in you and a close business partner?  We as in a group of passive investors?  

It is hard to tell whose interest you're representing from your post.  Are you a fiduciary for others or are you using money from you or possibly a few other partners?  

Assuming that you don't have other investors to answer to you probably would be better off refinancing early.  Given your exit strategy you probably didn't select the right loan up front, but having long money is always a good bet in my opinion.  You're simply paying the price for using long money and refinancing with an earlier exit strategy.  This is a great problem to have BTW.  

@Bryan Hancock  

Hi Bryan,  

When I see we, I am talking about my business partner.  He and I are both physicians and own a single specialty clinic.  We used our business to qualify for the no-down loan.  At the time, we didnt really have an exit strategy, we just wanted the building for our own use.  Now that we have it and have most of it rented out, we realize, we could do this same formula again.  However, it was when we realized this that we went back and actually looked at the loan terms.  Now we see we are locked in and there is a penalty for early payoff.  However, I just thought maybe we could negotiate with the bank to do the refi without the penalty.  Otherwise, they will be losing out on a loan that will perform.  And they will lose out on getting to do the financing for the next building.  

Yes, you are right this is a good problem to have.  I wish I had more problems like this.  Anyways, I think I just answered my own question.  Thanks!

In that case from a ROE standpoint your best bet is probably to:

1.  Wait out the lockout period

2.  Refinance during the most expensive prepayment year

3.  Deploy the capital elsewhere

How much equity do you expect to be able to pull out?  You may consider keeping some of it to strengthen your balance sheet too.  This would help you qualify for a new loan easier.  

Assuming you're using the same lender you may even negotiate something with them in trade for waiving part of the prepayment penalty if they finance your next loan.  You won't really know whether or not they'll play ball unless you ask though.  I'm not sure what type of loan you have so it is tough to know who really owns the paper and whether or not the person you think is your lender has the capacity to negotiate these items.  

@Rainier Guiang  - If its a great buy and hold property and depending on the location it can give a great cash-flow YoY. So I would suggest when you are closer to the 3 year period think if it is worth holding the property or sell it off for the appreciated value and move to the next one

@Bryan Hancock Yes, that is the plan.... wash, rinse, repeat formula. Since we bought the building with no money down, I wont really need to take out equity since the business should be able to qualify for another no money down loan as long as we can refinance the building with a non-recourse loan under the building's LLC. I dont know if that is possible to do however since most lenders are still asking for personal guarantees. I guess I should be researching where to find a non-recourse loan. Thanks for the advice!

@Nilesh Makhija  

 Hi Nilesh, I think I am more of a buy and hold forever kind of investor.  My goal is passive income for retirement. As a business owner, I am limited in what I can put away for retirement since I have employees. So 401k plans and other "qualified" plans are so limiting.  I also dont have much faith in the long term stability of paper assets. 

When lenders hear about non-recourse loan they start to back up because the borrower doesn't want to take any risk at all and don't want to be on the hook if something goes wrong. A legit borrower would have no problem giving a personal guarantee and going with a recourse loan.

Joe Gore

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