Commercial Loan Refinancing Suggestions?

Question

Was wondering if anyone had any lender suggestions for commercial loan refinancing. I'm looking for a 20-30 year fixed term, reasonable rate, minimal points (if any), and no more than 25% equity required. The property is located in Morehead, KY, 40351.

I am looking to refinance the current outstanding loan after finishing the rehab (no cash out required). The new appraised value will be more than enough to cover the current outstanding loan balance and equity requirements. All remaining appraised value beyond the required loan and equity requirements will be left as additional equity in the units.

Thank you.

Joel Owens · Answer

Yes I agree.

Jonathan small banks want the local business but do not want to give out long term debt at low rates. When what they have to payout for deposits goes up in rate they would be squeezed. Your loan is very small so it does not matter as much. Have you called around to all of your local and regional banks to see if they have an in house program where they keep the paper??

I think you will be hard pressed to find longer than 10 years fixed term. 5 is normal but most investors do not like those loans as the pay down time line is too small and you get hit with a refi bomb that could sink your investment. 10 years gives you more time or even seven to knock down balance owed to even if rates rise on a refi it will not affect you that much with the lower balance.

I have this same discussion with my clients with multifamily but it is on 1 to 10 million properties usually. Same concerns the numbers are just much larger. A 500k loan to a regular commercial lender is like a 50k house. There just isn't hardly any money in it for them. 1 million as stated above is when things really start opening up. Some private loan programs prefer 3 million and up. It's easier for them to fund larger deals than to put a ton of time into smaller properties. Lenders want to fund more volume with larger deals and then replenish the pipeline. I think you have a need but a low demand property and loan commitment so your options will be limited. The lenders that are there monopolize the space and make the rules.

Hope it helps.

David Beard · Answer

Min loan amount for these long term fixed deals normally around $1 million, and require the property to be stablilized with e 90% physical occupancy.

Here are typical Fannie terms.

http://www.arbor.com/loan-products/fannie-mae/small-loan/

I'm puzzled, since your building is 3 unit, and thus a residential property, are you not eligible for a conventional residential loan (these are for houses and 2-4 unit properties)?  That would be the only way to get 30-year fixed on such a property as you describe.

David Beard · Answer

Jonathan, how many units is this?  For this small loan size, you're almst certainly looking at a local bank and there is no chance of long term fixed.  More likely is 5.5%, 25 year amort, 5 year balloon or preferably an ARM that has a lifetime cap of 5-6% above the initial rate but won't require the bank to appove an extension like the balloon does.  Fannie and HUD offer long term fixed apartment financing, but for much larger loan sizes that can be securitized into CMBS bonds.

Jonathan H. · Answer

Is the process really as simple as:

Quit-claim from LLC to personal name > refinance > leave old LLC insurance policy on until finding new personal insurance with umbrella policy > cancel LLC insurance > Quit-claim back to LLC afterwards (and just pray "due on sale" clause doesn't hit)?

I feel like I'm over simplifying and over looking steps here. Would love to hear from anyone that has any experience with this process as to what else to expect.

Jonathan H. · Answer

Still looking for suggestions/interpretations on the question above referring to the quit-claim process... Thanks

Jonathan H. · Answer

Recently read a couple of posts on another link (https://www.biggerpockets.com/forums/49/topics/92129-refinancing-a-rental-in-an-llc) in which George Ramsay referred to possibly quit-claiming the properties into a personal name, refinancing and re-insuring, and then quit-claiming back to the LLC. Would love to be able to lock in a 3.5% 30 year fixed term. Would this be possible in our situation (3 buildings/units with separate 911 addresses on one plot of land)? I'm not very familiar with property ownership transfer policies and would hate to trigger the "due on sale" clause.

If it is possible, could someone more experienced please help describe the process and the best way to go about doing it? Can someone go into more detail after the property is quit-claimed back to the LLC... How does the individual pay a mortgage and insurance on a property that they personally no longer own? Obviously I'm missing a few steps here, so any clarifications are greatly appreciated.

Jonathan H. · Answer

Still looking to discuss if anyone else has any input. As previously stated, all help is greatly appreciated.

Jonathan H. · Answer

@ David

Thank you for the information on typical Fannie and HUD loans.

The property is one plot of land with three seperate buildings (3 seperate 911 addresses), thus cannot be ran as a conventional mortgage. Even if we intended to "move in" and live in one of the buildings for a short period of time and use it as our primary residence, we couldn't bundle the other two in with it. Since we are converting the large brick garage / extra building to extra units, our intended purpose as commercial rentals would be obvious. I'm open to suggestions though on how to do this another way if I'm overlooking something, I would love to have a 30 year 3.5% fixed rate.

@ Roy

Thanks for the input, was thinking that would probably be the case in this situation.

@ Joel

Ya, I have a basic knowledge of the the lending policies and how the "cost to borrow" impacts the loans. The best offer I have found so far was the one I mentioned above, 20 year ARM, 5 years fixed at a 5% rate. I found this one by calling local banks in the surrounding areas. We're considering taking it due to the low amount of options and just paying it off during the 5 year fixed term. The cash flow will be sufficient to pay it off in that term even after accounting for the other expenses (vacancy, repairs, insurance, etc). Was just trying to find a way to maximize cash flow to re-invest, but we do not want to leave ourselves open to major rate adjustments. Any suggestions?

Thanks for the responses guys, appreciate the help.

Roy N. · Answer

@David Beard @Jonathan H.

Most residential lenders here will not touch a rooming house and the commercial boyz & grrls are not interested in things <500K.   Also you would never get CMHC insurances on such a loan ... Fannie & Freddie may be more leneant.

Jonathan H. · Answer

The property consists of 3 units, 10 bedrooms (2x 4/2 units and 1x 2/1 unit) renting on a per bedroom basis due to location near local college. Ive already been approved for a 5% 5 year fixed 20 year ARM through one local bank. Is there no chance at all of getting fixed rates for a loan of this size? Would love to be able to limit losses (other than lifetime caps). In this case, might just be better to pay it off as fast as possible and use the equity and future rents as a down payment for larger projects which fall under Fannie and HUD financing guidelines? Trying to find the best way to capitalize on low rates and build a portfolio of more rentals before rates begin to rise again (if/when they do). Any thoughts on this?

PS: Just out of curiosity, what are the minimum qualifications for the Fannie and HUD fixed rate loans?

Commercial Loan Refinancing Suggestions?

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