Commercial loan interest rate change after 5 years
I have a commercial loan on a multifamily building that is about to hit a rate change after 5 years, and the bank has offered to lock in 3.2% for the next 5 year term. This is the same rate as my first term, but my understanding is that rates are lower now than they were 5 years ago although rising. The promissory note says that if we decline the fixed rate then our interest rate will be based on the bank's base rate (it describes this as their primary index published by intrabank memoranda at their sole discretion), and that the lender will tell the borrower the current base rate upon request.

The prepayment penalty also goes away in this second period so I can always shop around, just wanted to get some advice before proceeding since this is outside my wheelhouse. Thanks!
[{"id": "htfd9kt", "text": "Just to confirm, is there a current prepayment penalty? You should always get a second quote just to check your current lender and keep them honest. Also, any reason you don\u2019t have a Fannie/Freddie loan? What\u2019s your ideal term? Any IO on the new term? Does the leverage change at all?", "replies": [{"id": "htfh2gv", "text": "The current prepayment penalty is 1%. That ends in 2 months.\n\nWe only applied for loans from local banks, I wasn't aware Fannie/Freddie loaned to multifamily.\n\nNot sure what term I want, my goal is really just to minimize the total cost of servicing the debt. The note says 30 year amortization schedule so I guess no IO? This isn't my forte so I had to look up what that stood for. And no leverage I think, our LTV is pretty low so we can handle the risk of a variable rate if that is best.", "replies": [{"id": "htgb4sr", "text": "Fannie/Freddie loan to individually owned multi family, not commercially owned.\n\nAnd going variable would be a terrible idea.  Talk to another bank to make sure what you\u2019re being offered is competitive,  but it sounds it to me.", "replies": [], "depth": 3}, {"id": "htgp55e", "text": "The reason to go with a variable rate would be if you want more prepayment flexibility (you want to sell/refinance sooner) or you want to push leverage to like 80% loan to cost (you have future TI/capex work you want the lender to help pay for). If the goal is to hold this long term, the asset is stabilized, and you want to minimize your debt service I would look at getting a 10 year fixed rate loan and get the maximum IO you can. How low is your leverage, 50% LTV? There is low and then there is stupidly low where you\u2019re being inefficient with your capital stack. If your leverage is low already, you should be able to get a ton of IO which would also lower your debt service. \n\nWhats the organizational structure? Like who is the ultimate borrower? Fannie and Freddie do loan to multi, you would go through a broker (CBRE, HFF, Newmark, etc) who do the initial UW and work through the closing with you, and then sell the loan to Fannie/Freddie on the backend. You will also hear it be called \u201cagency\u201d lending.", "replies": [{"id": "htgwjx3", "text": "And note for the OP the agency loans are 5+ units. Below that they don't play.", "replies": [], "depth": 4}, {"id": "hthqjps", "text": "It's about 30% LTV. This is an inherited property that has been in our family multiple generations since its construction so we definitely run it way lower risk than a maximally efficient investment. Good idea about the IO, thanks.\n\nThe borrower is a corporation that owns the building. Does that structure qualify for agency lending? Is it possible we can get a much better rate that route or is the main appeal that they are non-recourse?", "replies": [{"id": "hthsjp7", "text": "I mean if if you pushed the leverage to 50%, that's still a very low leverage loan and you're getting some incremental proceeds. Pricing is still going to be very attractive too. You would definitely qualify for full IO at that leverage. Yeah that's fine - I assume you have a SPE LLC that actually owns the property, which then rolls up to the corporation and then to the family, or something like that. \n\n&amp;#x200B;\n\nLike fitzwilliam said, not sure about the size of the loan/number of units you have but there are agency minimums (5 units, min. loan size of 1mm, etc. ). The benefit of agency is 1.) generally a significantly lower rate, as ultimately the bonds that your loan will go into are backed by the US government 2.) they can quickly rate lock you (so if you think rates are going to go up you can lock in your rate 45-180 days before actual closing) 3.) as you mentioned, non-recourse 4.) you can do something called a supplemental loan, i.e if you increase cashflow at the asset, in two years you can go back to them and boost the leverage at the Property to match what the current value should be (although sounds like this isn't interesting to you). I work for a fund, and agency loans are our go to for MF that qualifies for all the above reasons.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "htgc27f", "text": "What is the spread to the bank's prime rate?  Most bank's \"prime rate\" are the same as WSJ so if you don't have a negative spread the fixed rate offered is lower from the outset.\n\nWhat is the size of the loan? Fannie has a small balance program if it fits.\n\nDoes your current loan documents have a ballon or just more 5 year rate calls and is fully amortizing?\n\nWhat are typical closing costs in your area (taxes &amp; recording)? You'll have to get new appraisal if you close a new loan so if other costs are more than de-minimus then moving for a few basis points is probably not worth it.\n\n3.2% isn't a bad rate at all but without knowing more about the property it's hard to say if it's the BEST rate you could get shopping it.", "replies": [], "depth": 1}, {"id": "htjaa40", "text": "Take the 3.2% and be done with it, that\u2019s a great rate. It doesn\u2019t matter if rates go lower, banks are hitting their floors. They can\u2019t lend money out less than that rate and stay in business.", "replies": [], "depth": 1}, {"id": "htjgwkp", "text": "Honestly assuming there are no fee's associated I would let it roll at 3.2% it's not a terrible rate. Then once you settle that out start shopping around Fannie/Freddie depending on the loan size.", "replies": [], "depth": 1}, {"id": "htneldy", "text": "I'd personally lock for 3.2%, thats pretty good but that is only if you want to stick with your local bank loan. Local bank loans are definitely the best for retail and industrial. But for multi family, if you wanna shop around, FHA multi family loans are amazing. If you ditch your current loan and refi with FHA, it's about 2.75% fixed for 30 years, non recourse (protected in the event of default), and 80% LTV, and yes I saw its an family owned and inherited property, that is no issue. Not gonna give my number on here, but direct message me if you have any questions.", "replies": [], "depth": 1}]