Regardless of the size of your portfolio, every investor at some point will turn to a lender for a commercial real estate (CRE) loan or mortgage. In fact, due to the high cost of most real estate, many investors use loans to help them purchase CRE since using leverage allows them to get the most out of their money. The only problem is that CRE loans are secured by the property they are attached to through a lien. That, combined with the fact that many commercial real estate loans are balloon loans that come due within five years of purchasing the property, means you need to create a plan to pay off your commercial loan before it’s too late.
Before we talk about the steps to paying off your commercial real estate loan, let’s take a closer look at a few important aspects of commercial loans.
Commercial Real Estate Loan: Terms of Repayment
Commercial real estate loans are either long-term or intermediate-term.
- Long-term loans last from a period of 10 to 20 years and are similar to residential mortgages.
- An intermediate-term loan needs to be paid off between three to seven years.
- There are two kinds of intermediate loans: a regular intermediate loan, which is paid off monthly throughout the loan period, and a balloon loan.
- Balloon loans are trickier, since for most of the loan period you pay interest and a small portion of the principal; the full amount of the loan must then be paid when the loan comes due. It’s the last payment that often leaves investors in a bind. It’s often a huge sum, and if you’re unable to refinance the loan or sell the property, you’ll end up losing the property.
No matter which type of commercial real estate loan you have, hopefully, you’ve planned for the payoff and you can make that final payment with glory. But what if you can’t?
How to Prepare for a Maturing Loan
Talk to your lender or mortgage company four to six months before the loan comes due to find out if the lender is willing to renew. Don’t wait until the loan is due to take this step. You could have a nasty surprise if, at the last minute, you cannot renew the mortgage. You could potentially lose the property. However, there are a few things you can do beforehand if you find out with enough time that it’s not renewable, which we’ll cover in the next section.
Don’t forget when you speak to a lender to come prepared: bring copies of all your financials, such as balance sheets, profit and loss statements, and tax returns.
What to Do if Your Lender Won’t Renew Your Loan
Why would a lender not renew your loan and what do you do if this happens? Banks and mortgage companies have their own reasons for not renewing, but it’s not uncommon for a lender to be extricating itself from a particular market or location.
Negotiate a non-recourse loan. If the lender says no, you might be able to negotiate a non-recourse loan instead, which you can pay off at a discounted price if your loan balance has an LTV of 75% or less.
Ask for a short-term extension. You can also see if the lender will allow you to get a short-term loan extension. Loan extensions are more common in construction loans, such as when a project is running behind. This option was popular in the past but has become less popular due to the number of properties that flooded the market when owners were unable to repay the loan at the end of the loan extension period. However, it can’t hurt to ask, since the worse that can happen is you’ll get a no, which is what you had anyway. If they tell you to come back later for an answer, don’t wait to start investigating refinancing options from other lenders.
Refinance the loan. Even though it can be trying to search for a lender willing to refinance your loan, this can be an option with benefits. A potentially lower interest rate can help you save money on your loan, and longer terms can reduce your monthly payments. Both can increase an investment’s cash flow and ultimately, the value of the property. Commercial mortgage refinancing does take time and extra paperwork no matter which lender you choose — your current lender or a new company. They want a complete financial picture of the business to ensure it’s a sound investment for you both.
Seek a hard money lender. There are also hard money lenders to consider. These lenders will often lend for the purpose of paying off a small business loan or real estate loan. They base their lending decisions primarily on the strength of the real estate collateral. This option buys you time to realign your finances and plan for the new payoff.
When you shop around or start the process of extending the loan, renewing, refinancing, or using a hard money lender, be prepared to show at least two years’ worth of:
- Profit and loss statements
- Cash flow records
- Tax returns
You’ll also need to bring a business plan, including your bio and that of any partners. Lenders will use these to help determine the direction of the investment and to verify that you are capable of successfully managing the property.
Don’t be surprised if the lender insists on a personal loan guarantee, even if you have set up a real estate LLC to avoid this exact situation. Lenders can ask for anything they want to ensure they have recourse to seize your assets in case things take a downturn.
What to Do if the Loan Matures Before You Can Pay It Off
If the loan comes due before you can either repay or refinance it, then there is one last trick you can try with your lender: request a forbearance. Forbearance agreements can last from 60 days to 12 months, allowing you enough time to continue seeking a refinance or to sell the property.
Hard money lenders are also a viable option here as they can typically provide the funds you need fast, sometimes within days. With a solid real estate asset, you can get out of a sticky situation without having to go through the worst-case scenario: bankruptcy.
How Can NNN Lease Properties Help this Situation?
Triple net (NNN) lease properties are very affordable, making it easy for many CRE investors to pay all cash or use a 1031 exchange. Savvy investors with multiple net lease properties will sometimes take out a NNN-specific commercial loan for each new property — 5, 10, 15, 20 years — then pay it off early, and not have to worry about maturing loans. When you own absolute triple net properties, most often the debt services the loan easily, so it is rarely a problem. This assurance also inspires banks to offer better interest rates and terms on net lease mortgages, so it’s a win-win for you and the lender.
To Wrap it Up — Be Proactive When Your Commercial Loan is Coming Due
When your commercial real estate loan is coming due, hopefully, you’ve planned accordingly and you can make that final payment, then celebrate! If not, you can explore other options such as a loan extension, refinancing, or a loan renewal. There are also hard money lenders to consider, which can be a viable solution that allows you time to breathe, realign, and move forward.
Have commercial real estate questions? Westwood Net Lease Advisors is here to help. Our advisory team has decades of experience helping CRE buyers navigate the buying process and offers a nationwide network of reputable resources, including investors and lenders. Our buyer representation is free, from our initial conversation through closing and thereafter. Contact us today for a no-obligation discussion. 314-997-5227