Commercial Finance Solutions

7 Important Responses to Commercial Finance Issues & Questions

March 24th, 2008 · Comments Off

Written by Richard Noah

Prepayment Penalty and Lock Out

A pre-payment penalty is a common feature with commercial loans. Since many commercial loans are not designed to be short-time financing solutions other than those from a hard money source, many charge a pre-payment penalty to be imposed in the event of an early payoff. A lock out does not prevent the payoff of a loan. It is an agreement to pay all of the interest that would have been due during the time period covered by the lock out. Since our commercial loans are considered to be long-term financing, the prepayment penalty and lock out should not affect the payment schedule.

Please Note - The prepayment penalty fee may be avoided after the lock out has expired and property is conveyed by assumption of the mortgage. Prepayment penalties vary by the term of the loan. Please consult us if you have other concerns.

Appraisal Fee

Many lenders determine which appraisal firm is used. The reports are very detailed, and require a lot of research and investigation. The cost of the report reflects the level of information and analysis required by the investor. A complete summary appraisal report is often required so that the appraisal analyst can fully appreciate the market area and the market for comparable properties to justify the subject’s appraised amount. A complete summary appraisal will include all of the necessary research and investigation required to make a prudent lending decision for a stated income/asset program. A complete summary appraisal may be in the $1,500 to $3,500 range.

Many lenders reserve the right to order a “Limited Appraisal Report” based on property type and location. Limited Reports are usually lower in cost and result in faster turnaround times.

Taxes and Insurance Escrows

Non-payment of taxes and insurance place an unacceptable risk on the lender. In some cases of unpaid taxes, the lenders first lien position is compromised. Our lender requires that an escrow account be established to cover the taxes and insurance premiums due for the subject property. Lender reserves the right to waive escrow of insurance premiums based on the borrower’s qualifications.

Interest Rate

The interest rates available from a stated income/asset program (no verification) reflect the increased risk assumed by the lender.

LTV

LTV’s are consistent with the “stated” program reflecting risk assessment. Because commercial properties may be less liquid than residential properties, an equity cushion must be maintained to compensate for the risk involved. A liberal 90% CLTV program is offered to assist buyers with limited cash assets to buy commercial property. In fact many full document lenders will not allow for any type of seller-held second and will limit the amount of cash-out in a refinance transaction.

Environmental Due Diligence

Our lender performs an Environmental Due Diligence on every commercial property being considered as collateral. That process has been simplified by requiring the property owner or borrower to complete an Environmental Questionnaire describing the history

and present use of the subject property. On more complicated property types such as Industrial/Automotive properties, the lender may require that Phase I and/or Phase II reports be provided.

Terms 15, 20, 25 and 30 year terms

Our lender provides several term options. These loans are fully amortizing without a balloon payment due in a few years. Most commercial lenders require a balloon provision on their notes. Balloon provisions are very costly to the borrower because it forces the borrower to seek new financing in the future.

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7 Important Responses to Commercial Finance Issues & Questions

March 24th, 2008 · Comments Off