Baby Gifts

Have a few questions regarding a commercial mortgage refinance? Few are the most typical questions we are asked on a daily basis.

Timing - will it really take 30 days to close?

No, unfortunately it will probably take longer than 30 day from start to finish to close your loan. 60 days is really the norm on an average deal, though 45 days is doable. 30 days is universally under estimated by banks, lenders and brokers. If someone tells you they can close your loan in 30, they're either a rookie, or just trying to tie up your loan. Which of course, is a really poor way to start off the transaction.

Despite your potential frustration and aggravation on why it takes so long, it better to just accept the process and be as diligent as possible in submitting all of the required documentation from the bank. One of the biggest delays is the borrower's inability or just plan reluctance to provide the required items. Too often the borrower feels justified that the bank is just being overly conservative or to thorough. All this does is simply stalls the process. Once requested, banks rarely back down from needed documentation.

What are the fees?

They're actual pretty much the same across the board. There is normally a 1% bank fee, often lenders will have a processing fee of approximately $1000, appraisal reports range in cost from $2,000 - $5,000 (though it's not uncommon to see appraisals more like $10,000 or more on larger, special use properties), title ranges from $800 - $2000 again depending on the loan amount/state, and a phase one environmental report will cost around $1,500 - $2,000. Some properties like multifamily will not normally have environmental fees or if they do it will be more of an environmental survey which costs approximately $800.

What can I expect for loan programs?

It really ranges widely depending on the deal. Amortization periods range from 15 to 30 years, fixed periods from floating to 30 years, stated income, .8 dcr minimum required, 90% financing, etc. Also, it pays for the borrower to keep in mind that banks can use the same loan program but roll it out it different ways. For example 99% of banks offer the SBA 7a loan as a floating product. However, there are a few that offer this as a 5 year fixed, 25 year amortization loan.

What is a prepayment penalty, and can I get out of it?

Prepayment penalties are fees that borrowers incurs if they pay off the loan, either by selling the property or refinancing the debt, before the agreed upon period. The timing is normally between 3 -5 years with some CMBS lenders going as long out as 10 years. The fee is almost always in the form of percentage of the loan balance, i.e. 3 -5% of the loan amount. In other words if the loan amount is $1,000,000 and the borrower has a 5% pre pay it would cost him $50,000 to pay off the loan early.

It terms of getting out of it, yes it is possible, though the pool of lenders that offer this is greatly reduced. It's probably, and this is a guess, 1 out of a 100 banks or lenders will either outright waive it or more likely ask for an increase in interest rate to justify the compromise. And I'm referring to a new loan. Once in place, you are pretty much stuck (though you could look into a defeasanse or have another borrower assume your loan). We work with a bank out of Virginia that commonly waives all prepay's though their rates are a little high.

What is the application process?

After the borrower agrees to move forward with a bank/lender they will be asked to fill out an application and provide documentation. What is normally requested is a personal financial statement, three years of business and personal tax returns, year to date profit & loss statements and year to date balance sheets. After a full "scrub" of the above by underwriting, the lender will normally issue a term sheet, which itemizes the offer by the bank. Its normally a couple of pages long, and spells out the bigger issues such as rate, amortization period, etc and smaller issues with of course includes a lot of small print protecting the bank. If the borrower wants to move forward they will need to sign the letter and write a check to the bank to cover the appraisal, environmental and sometimes a processing fee.

At this point the loan is officially in process. The lender will engage an underwriter to thoroughly review the funding request and will issue a needs list with additional documentation needed beyond what they already have. The third party reports will also be ordered at this point. Once the needs list has been satisfied, and all third party reports are in the bank will officially approve the loan (or not) and set up a time to close.

It is a good idea for the borrower to be patient and encourage the bank to be as thorough as possible with their preliminary underwriting so you do not waste your time and money on third party reports, as it can be difficult to get a "refund".

248 885-8797 Jeff Rauth is President of Commercial Finance Advisors, Inc out of Birmingham, Michigan. He specializes in Commercial Real Estate Loans between $300,000 - $5,000,000. Offers unique loan programs such as Commercial Second Mortgages, Commercial 30 Year Fixed and 90% non SBA financing, and Commercial Equity Lines. 248 885-8797

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