Commercial Apartment Loans
Although rates have started to slowly climb back to historic norms, they are still overall very attractive. Most of our lenders are offering a five year rate, and some offer a seven year rate. We have only one lender now who offers a ten year fixed rate. This is reflective of industry concerns about rising rates; banks don’t want to hold your 4.00% rate for ten years when rates could be back at 6.00% by 2018.
It is important for consumers to look at more than just the rate. This is of course the first question every consumer wants to ask, but more seasoned investors will look more closely at the “terms of conversion” or how the rate adjusts after the five year period expires, which is typically index plus margin = new rate.
Even more important are the prepayment terms. Many lenders now have a prepayment penalty and a yield guarantee, or a defeasance clause. Your plan is to buy and hold? Terrific, but life is unpredictable and a statistically high number of commercial loans need to sell or refinance in the first five years.
What about points? Most commercial loans require at least one point. Most of our lenders provide a commercial loan at par (no points) which allows room therefore for the broker to charge a point (more or less) and still have the loan be competitive.
What about wear and tear on the buyer / borrower? We just closed a large commercial loan in southern California for a 25 unit property, and we were competing against the Freddie Mac program. (This is a great program by the way, but not when you are in a hurry…). The Freddie Mac program had a better rate than we did, but not by much.
The Freddie program not only asked for a huge fee in advance, but required an engineering study (along with the appraisal) – many thousands of dollars to hire an engineer, and had other difficult hurdles, including requiring an insurance policy with a terrorism rider. After a while, the client gave up and focused on our loan, which had a great rate, was non-recourse, and the client paid less than one point, and we finished ahead of schedule.
So not only did we close the loan ahead of schedule, but we also saved the client from losing his earnest money deposit, which he would have lost with the Freddie Mac loan. Of course, he not only would have lost the deposit – he would have lost the property as well.