I know this is long, any comments appreciated!

This is a small deal - commercial real estate, old downtown building with 1 retail space and 1 residential apartment above.

Loan of $186,550 taken 3 years ago. Prime plus (1.5?) with a floor of 5.5%. Mo. payment $1,291.

Balloon payment now due, $172,668. New terms from my lender are 3 more years on original amatorization at fixed rate of 8.64% for three years with balloon payment again due. They have added a prepayment penalty I didn't have before at 6 mo. of interest or some other yield calculation.

I also owe a second mortgage at $34,800 at 5% payable over 5 years beginning next year.

The building was appraised at $270,000 4 years ago and should easily be worth $300k or more at this point as downtown values have moved fairly rapidly. Monthly income is $2,050.

The new terms are making my monthly go up 26% to $1,631 which will be unaffordable when the other loan payment kicks in next year a total of $2,287 due monthly, not including taxes, insurance, maintenance.

I didn't shop in advance for another lender and now am down to needing to sign these new terms. What is my out here? Is this where a bridge loan can help me to pay off my current and buy time to shop around?

I don't mind the bank making some money but I've paid them $30k in interest over the past 3 years and the new terms don't seem too good. Thanks- Fanch

Fanch,

I ran some quick numbers based on the current market rates (in my area) and on how my bank (i am a commercial underwriter) would look at your loan. Based on the $2,050/month in rental income, this transalates into $24,600 a year in income. If we were looking at your loan, we would look at refinancing it at 7.75% (Current market), a 300 month (25 year) amortization and a PV of $207,500 (the total debt on the property). This yields monthly P & I payments of about $1,567.31. Based on the monthly income, this yields a DSC of 1.31x. Although this appears OK at first, no expenses have been taken into account. Once these are considered, it is very likely that your debt service coverage ratio will fall below 1.2x, which would have the loan request be declined...

Although my bank would probably not do this loan, other banks may do it...probably not at the 7.75 rate (a little higher because of risk), but they still may do it... If you can't find another bank to refinance it (and you should definitely shop around), here are some other options...

[Option 1] Is it possible to raise the rent on the tenants? If the building is really worth $300k, the rent you obtain would appear to be slightly below market and raising the rents would immediately improve the debt service coverage.

[Option 2] If raising the rents is not an option, you could possible go back to your lender and request the first be refinanced into a line of credit (to minimize your payments in the interim), and then look for a buyer for the property as it appears (to me) that the property does not produce adequate cash flow to support a refinance into a coventional loan. If it is worth $300k, selling it (cashing out) and making $93K is not the worst thing in the world. If you want to stay in real estate, you could consult a tax professional to try and defer paying the cap gains tax and then use the $93k as a down payment to invest in a property that yields a debt service coverage of 1.20 DSC or more (after expenses). This may be a little bit of financial advice (rather than loan advice), but in my opinion, this would probably leave you better off...

Just some ideas

Fanch,

I made the previous post; I just fogot to log in.

Regards,

TMH

I would gladly take a look at your loan request and see what kind of rate I can get for you. Please go to and fill out my preferred application and send to me so I can see if I can locate better terms for you. Looking forward to hearing from you and hopefully doing business with you. Thank you.