What to Do When Your Commercial Loan Comes Due

Jan 15, 2018

Regardless of the size of your portfolio, every investor at some point or another will need to turn to a lender for a commercial real estate loan.

In fact, due to the high cost of the commercial real estate, most investors use loans to help them purchase a property, since using leverage allows them to get the most out of their money.

The only problem is that commercial real estate 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 you should take to pay off your commercial real estate loan, let’s take a closer look at a few important aspects of commercial loans.

Terms of Repayment

commercial loan repayment

When you get a mortgage on a residential property, you repay the loan back every month, over a fixed period of time.

Commercial real estate loans, however, come in two flavors. The first kind, long-term loans, last from a period of 10 to 20 years, and are similar to residential mortgages.

The second type of loan is an intermediate-term loan since it needs to be paid off in anywhere 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 your loan or sell the property, you’ll end up losing the property.

How To Prepare For A Maturing Loan

maturing commercial real estate loan

Talk to your lender before the loan comes due.
Don’t wait until the loan is due to speak to your lender. At least 4 to 6 months before your loan comes due you should find out if the lender is willing to renew. Many an investor has had a nasty surprise when they assumed a lender would renew, only to find out at the last minute that they were on their own.

Lenders have their own reasons for not renewing a loan. Sometimes it’s because they want to get out of a particular market or location, and if you’re lucky, you may be able to negotiate a non-recourse loan that you can pay off at a discounted price if your loan balance has an LTV of 75% or less.

Don’t forget when you speak to a lender to come prepared: bring copies of all your financials, such as balance sheet, profit and loss statements, and tax returns.

What To Do If Your Lender Won’t Renew Your Loan

what to do if the bank won't renew your commercial real estate loan

It may be a shock when you find out your lender won’t renew your loan. However, don’t let that stop you from taking immediate action. Not against your lender – as tempting as that may be. Instead, ask them if they’ll be willing to take a discounted loan payoff.

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 more 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 for an answer to start investigating refinancing options from other lenders.

Even though it can be trying to search for a lender willing to refinance your loan, they do offer several benefits. Lower interest rates 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 loan refinances do take more time and requires more paperwork than the first time around. That’s because lenders are looking for a complete financial picture of the business.

Bring 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 them 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 though you have most likely set up an LLC to avoid this exact situation, lenders want to make sure 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 worse happens and the loan comes due before you can either repay it or get refinancing, then there is one last trick you can try: request the bank to give you a forbearance. Forbearance agreements can last from 60 days to 12 months, allowing you enough time to continue seeking a refinance or sell the property.

Lastly, if the forbearance period ends before you can repay or refinance the loan, you can ask for another forbearance period, or as a last resort, file for bankruptcy. Although this will have consequences, it will force the bank to restructure the loan and any other debts you have.

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