ARM and Prepayment Penalty

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ARM and Prepayment Penalty
Posted by: Tom Jul 6 2004, 03:37 PM
We the three partners of an “S” Corp. are in negotiations to purchase the property that we occupy. We are a Property Management Company but we deal exclusively in Residential Properties. This is what we were offered:
Loan Amount: $550,000.00 (Appraisal)
Loan term: 10 years, 300 month amortization
Rate: Wall Street Journal Prime plus 1.5% with annual adjustments
Prepayment Penalty: 1% waived if within 6 mos of maturity
Loan Fee: 1.5%

We don’t like the “Annual Adjustments” and “Prepayment Penalty”. One or the other, not both.

Are we asking for too much?

Posted by: loanuniverse Jul 6 2004, 04:33 PM

”Are we asking for too much?”

Before I answer the question, I would like to know if you are getting 100% financing… Just exactly what do you mean by ” Loan Amount: $550,000.00 (Appraisal) “ ?

If you are getting 100% financing then you are limited as to the places where you can go borrow the money, and I would have to say that yes, you are asking for a lot!. If on the other hand, your business is established, has enough cash flow to service the proposed debt, and the loan-to-value is 80% or lower… then you have room for bargaining.

Prepayment penalties are bad, but getting rid of that yearly repricing could save you the most. At the very least request repricing every five-years. Trust me on this, as late as 2001 I was doing analysis on income producing properties using a 9% prime. That was less than 4 years ago. Prime is currently 4%, so this means an additional $25,000 a year in a half a million dollar loan.

It all depends on how strong your bargaining position is.

Good luck.
Author: Commercial Loan Underwriter