Board Topic: what to expect while getting a loan etc
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what to expect while getting a loan etc

Posted by: Mr. Needaloan Oct 15 2003, 05:48 AM
Hello, rolleyes.gif

Good site !! May I please ask for your valuable and expert opinion my friends. In order to get $ 300,000 for a commercial loan to buy out a business for a commercial strip shopping center with a value of probably 1 million dollars but at least $ 800,000, what should I expect out of a bank ? What would an expert like you ask for ? The property has buildings that only take up about 1 /8 of the land. I would like to be able to develop the bare land soon and generate some good cash flow. Is it possible that I could structure the loan so that I could have flexibility to sell or lease some of the land off the back or side and not have to get the banks permission. I might want to pay off the debt early if I got in financial trouble by selling a portion and not have to pay a prepayment penalty. In other words can I just pledge as collateral part of the vacant land for the $ 300,000. That way if things worked out for the worse I could sell a portion and pay off the bank or if they foreclosed they would not get the whole property. Shouldn't I be able to get an appraiser to calculate how much land that would be? All the land is one parcel at this time and zoned the same. What would you ask for friendly expert if you were in my shoes !

The rent is about $ 2500 a month but probably could go up to about 3500 if everything rents out. I want a safety margin. The buildings are old and one appraiser said highest and best use would be to tear them down and start over. What kind of length of time is reasonable to pay back the loan. Does anyone give 20 year fixed rate loans for something like this ? I would prefer long and low. What should I look for ? Are there tax advantages to extending the payments as long as possible ?

I have been given 2 proposals ( letters of commitment) from 2 banks saying that if I would commit they would give me a loan but I have not seen the fine print on any final documents. I do not want to commit until I have seen the fine print from the banks so I can compare terms. One other banker guy just speaks quotes and numbers and has not even given me a letter of commitment to sign or written anything down. It seems like he does not want to put anything in writing for me to look at until I get in his office and sign it. Would you sign a letter of commitment without seeing the final paperwork ? The oral guy told me he felt like I had committed to his bank and he has already hired a surveyor and a appraiser and told me he wants a check so he can recoup his fees and close the loan. What is your viewpoint on that ?


Can you explain what the language on these offers mean and and compare and contrast and give pros and cons between the three o wise one ?

This is one offer. What does it mean when the loan officer says I am offering you a 5 year balloon with a 20 year amortization and the interest rate is 5.9 percent fixed for 5 years or Prime + 1/2% floating ? I thought a 5 year balloon note meant that the whole amount is due in 5 years. Does that mean they can foreclose on me then if they want to ?
There is no prepayment fee but a 1,000 dollar origination fee and I will have to pay all closing costs and expenses of the loan.

Here is the second offer.

Rate: 60 months fixed at 5.9
Term: 5 year balloon with a 15 year amortization
Repayment: Monthly payments of principal and interest of 2,515
Fee: 1%
collateral: First mortgage on the commercial real estate
other conditions Normal collateral requirements, such as assignment of leases, clean title policy, a current appraisal, environmental insurance and a decreasing pre-payment penalty of 3/2/1.


here is the third offer:
This is the oral guy
10 years fixed at 5.995 with payments of $ 3330
or 15 years with a 5 year balloon at 5.995 with payments of $ 2532
1% percent origination
pay for a current survey, appraisal and a recording fee


Should I go back to these guys and see if I can get the offers more favorable ? Is it typical for the borrower to back to them and say I have a offer I would like you to beat, and tell them what it is, for example dropping a prepayment penalty or adding years to the time?

Should I talk to a local credit union and see what type of loan they could give me?
Are small local banks more likely to have terms more favorable to a borrower ?

A lawyer told a friend of mine to stay clear of SBA loans because they are a hassle ? I wonder why he thinks so? Would you go after one in this case ?

Please share your wisdom.
Thank you very much. smile.gif

Mr. Needaloan

Posted by: loanuniverse Oct 15 2003, 03:37 PM
Mr. Needaloan:

Thanks for the compliments, but I do not consider myself an “expert”, but thanks. Now to your questions:

what should I expect out of a bank ?
The bank will want to know information about you {financial, experience}, about the property {tenants, condition, market value}. About the transaction {sales price, the amount of equity you will be providing} and most importantly will want to know if there is a capability of repayment

What would you ask for ?
I will ask for the following:
1- The purchase contract
2- Your personal tax returns for the last three years.
3- Your personal financial statement certified to the bank.
4- Some background information on you as the borrower. Experience in managing income producing properties or commercial real estate investment? Got a resume?
5- A rent roll.
6- Copies of the leases.
7- A breakdown of operating expenses.

The property has buildings that only take up about 1 /8 of the land. I would like to be able to develop the bare land soon and generate some good cash flow. Is it possible that I could structure the loan so that I could have flexibility to sell or lease some of the land off the back or side and not have to get the banks permission?
Possible it is. Likely it is not. More than likely you will have to settle for some kind of verbal assurance that a partial release of the collateral will be looked at if the situation arises. There will be no commitment on the part of the bank of approval at that time. If the situation makes sense and does not increase the risk to the bank, they will not give you a problem. There might also be some expenses associated with this type of transaction.


I might want to pay off the debt early if I got in financial trouble by selling a portion and not have to pay a prepayment penalty. In other words can I just pledge as collateral part of the vacant land for the $ 300,000. That way if things worked out for the worse I could sell a portion and pay off the bank or if they foreclosed they would not get the whole property. Shouldn't I be able to get an appraiser to calculate how much land that would be?
Ok I see the following problems with the above statement.

a- Right now we have one parcel of land. The only way that the bank has to do to secure a lien is to record a mortgage on all of it. There is no such thing as a partial mortgage..... that I know of. You will need to get the property split in two.

b- Loans on undeveloped land are subject to a much lower loan to value than for a shopping center. Most banks put a limit of 50% LTV on these deals. Is the undeveloped land alone worth $600,000?

c- Yes, you can get an appraiser to give you an appraisal of the parcel as it is and as two separate parcels.

The rent is about $ 2500 a month but probably could go up to about 3500 if everything rents out. I want a safety margin. The buildings are old and one appraiser said highest and best use would be to tear them down and start over.
I see very low income for the type of valuation numbers that you were talking about earlier. This leads me to believe that either the appraiser is right, there is a lot of undeveloped land or the value is overstated.

What kind of length of time is reasonable to pay back the loan. Does anyone give 20 year fixed rate loans for something like this ? I would prefer long and low. What should I look for ? Are there tax advantages to extending the payments as long as possible ?
Extending the payments is great for the borrower as it improves the cash flow. However, 20-year fixed rate is not the industry norm. Amortization can be over 20 or 25 years, but the lender will want a balloon in 5 or 10 years. {depending on how hungry the lender is}.


I have been given 2 proposals ( letters of commitment) from 2 banks saying that if I would commit they would give me a loan but I have not seen the fine print on any final documents. I do not want to commit until I have seen the fine print from the banks so I can compare terms. One other banker guy just speaks quotes and numbers and has not even given me a letter of commitment to sign or written anything down. It seems like he does not want to put anything in writing for me to look at until I get in his office and sign it. Would you sign a letter of commitment without seeing the final paperwork ? The oral guy told me he felt like I had committed to his bank and he has already hired a surveyor and a appraiser and told me he wants a check so he can recoup his fees and close the loan. What is your viewpoint on that ?
How can you have commitment letters without a letter? A serious commitment letter not only spells out all of the terms and conditions to the point of boredom {for good reason}, but it also gives you a couple of working days for you to decide. It is not a matter of ”here it is, but you need to sign it now! I suspect that you have not been given a commitment from anyone yet, and they are talking about terms without committing themselves to doing the loan.


Can you explain what the language on these offers mean and and compare and contrast and give pros and cons between the three o wise one ?
The first offer seems like the one that is the best to start with. First let me give you the negatives about each of them and then I am going to tell you what else you should try to get from the first guy to make the deal even better.

The items I do not like about the offers:

First offer Seems like a very reasonable offer just like one that my employer would make. The origination fee seems even better than what we offer as it is usually 1% or 0.50% of the total loan amount. The five year balloon does not mean that they can foreclose. It means that the lender wants to get paid the balance in total at the end of the five year period. I would rather have a longer amortization, and a repricing instead of a balloon.

Second offer I do not like the 15 year amortization. The lower the amount of years, the higher the payment. The fee is higher than the $1,000. If your loan is $300,000 then the fee is $3,000. Prepayment penalty I really don’t like.

The oral guy I don’t see a rate. The amortization is only 15 years. The origination fee is higher than the first offer.

What you could ask the first lender to change to make it better:

I would ask for a repricing at the end of five years instead of a balloon. The structure of the deal would change from a five year loan with a twenty year amortization to a ten-year loan with the interest rate fixed during the first five years and a repricing at the end of the first five-years to a new rate, which will be charged for the remaining five. The main reasoning for the balloon is to avoid long-term interest risk, but you can counteract this argument by doing a repricing half-way through the loan.

Of course, you want the fixed rate for the first five-years and then the repricing will be to something like “prevailing prime rate at the end of the first five year period plus a 1% premium”. Either way you are going to have to refinance at the end of the five-years so you might as well not have to pay another origination fee and another appraisal {which could be as much as $4,000 for a commercial property}.

The second thing that I would like to get is a twenty five-year amortization instead of a twenty-year. This might be a bit more difficult to get than the repricing as some banks might only want to go twenty-years as per their policy, but it doesn’t hurt to ask.

Should I go back to these guys and see if I can get the offers more favorable ? Is it typical for the borrower to back to them and say I have a offer I would like you to beat, and tell them what it is, for example dropping a prepayment penalty or adding years to the time?
The worst thing they can do is say no. I would just go ahead and deal with the first guy and bring up the two items that I mentioned. If you have the time contact all three or maybe even a fourth.

Should I talk to a local credit union and see what type of loan they could give me? Are small local banks more likely to have terms more favorable to a borrower ? A lawyer told a friend of mine to stay clear of SBA loans because they are a hassle ? I wonder why he thinks so? Would you go after one in this case ?
Not so sure if this is a credit union type of loan, but go ahead if you want to be thorough . This type of loans are very standard, just count the number of shopping centers in your city and you will be counting the number of loans. I don’t think that there is much difference. Even your first and second set of terms are not too far apart. SBA loans can be a hassle, but you are not financing a business? You are financing the purchase of commercial real estate. I don’t think this will qualify. I have not seen an SBA loan in years so I am rusty. Go to their site and look up the qualifications.

Good luck.

Posted by: Mr. Needaloan Oct 27 2003, 12:14 AM
smile.gif

Thanks for the good and helpful advice. I learned a good bit from your help. I plan on visiting your site regularly and telling my friends. I also plan on using your wise advice to talk with a banker soon.

Thanks again,

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