The 30-Day Myth about Refinancing Commercial Loans, Start Refinance 6 Months Before Balloon Date

[Raymond Day]

“As of mid-2012, about one in three loans coming due through 2016 was under water, meaning the property is worth less than what's owed, according to one estimate from Trepp”. (Wall Street Journal)

Is your business loan balloon coming due in the next 6-12 months? Is your balloon payment more than 70% of the value of your business?. Do you think that with all of the positive factors happening in the Commercial Lending world right now, that you will easily be able to refinance?

NEWFLASH: Banks are not refinancing commercial loans……..

"We can look out three to four years and know with certainty that a super amount of debt will come due that can't be dealt with in an ordinary way," says Phil Jemmett, chief executive at Breakwater Equity Partners, a San Diego consultancy and investment firm that specializes in troubled commercial real estate. "Roughly 20,000 small commercial properties…are facing distress in the next 12 months. We expect similar numbers in the next three years, and then it will taper off after 2016."

“Roughly 90 percent of commercial mortgages require a balloon payment after five years,” says Vincent Shin, first vice president and manager of the South Regional Underwriting Center for Wilshire State Bank. “So owners may need to consider creative financing options to avoid a short sale or foreclosure.”(sbnonline.com)

“More than half of the $1.4 trillion in commercial mortgages coming due nationwide in the next five years are underwater and many banks are refusing to renew the loans.”(sbnonline.com)

The solution is to find financing from private equity investors. There are plenty of funds available from these sources and it seems like the loans are easy to obtain. Unfortunately, as business owners are finding out on social sites like LinkedIn and www.RealEstateFinance.Ning, there’s a tremendous amount of inquiries into rather this funding even exists. The reality of the situation is funding does exist, if your business meets the criteria. The perception in the marketplace seems to be “We can Finance Any Loan”, and although that may be true, the number of loan rejections is telling a different story.

“While bankers used to accept a debt service coverage ratio (DSCR) of 1.0, bankers now want a DSCR of 1.25. To give you an example of the impact, a business owner now needs monthly cash flow of $12,500 instead of $10,000 to qualify for a $10,000 loan payment. Compounding the problem, banks are requiring loan-to-value ratios ranging from 40 percent to 50 percent and high occupancy rates for tenant-occupied buildings” (Vincent Shin South Regional Underwriting Center for Wilshire State Bank). Compounding the problem, banks are requiring loan-to-value ratios ranging from 40 percent to 50 percent and high occupancy rates for tenant-occupied buildings.

Lenders have several loan consultants bringing them perspective loans, allowing them to cherry pick the loans they want to fund. Unfortunately, the consultants are seeing many more rejections on a percentage of submittals vs approvals. Another major challenge the industry is facing: The inability of untrained and inexperienced consultants to submit properly packaged loan requests.

Commercial investors are very specific in their criteria in loaning to commercial entities. A loan package that is not presented correctly to the lender can be rejected immediately, even if it would have been a loan the lender would have approved. This happens because the consultant does not know how to properly package the loan request to meet the specific parameters of that particular lender. In the end, this can cause a business to have to file bankruptcy, or even worse, lose the entire business due to a lender calling the balloon note due.

There are many ways to avoid this issue; the primary focus of this article is to bring awareness to business owners, to start refinancing 6 months in advance. Using a loan consultant who has commercial business experience can be beneficial. In many cases, these consultants are able to structure your loan based upon lenders criteria from the beginning.

For more in depth information about obtaining new commercial loans please contact Raymond Day through LinkedIn: www.linkedin.com/in/crebf/”

The 30-Day Myth about Refinancing Commercial Loans, Start Refinance 6 Months Before Balloon Date