Traditional Mortgage on Commercial Building?
Hello everyone. I have some questions about potentially buying a piece of commercial property. Today I was walking through a friend's store and was notified that the building is for sale at a below market price. It's an old building I've admired since I moved here and I've always wanted some investment property to provide a little bit of income on the side.

I started to consider what it would take to buy this property and learned that loans for commercial properties don't work the same as they do for residential. I have a couple of questions:

1) Is it at all possible to pull out a 15 or 30 year loan like you would for a residential home? I could see why it wouldn't be possible for a large loan; but what about a smaller loan?

2) When buying with a balloon mortgage, does refinancing the balloon payment look bad on your credit? or is that standard practice?
[{"id": "e436rpe", "text": "A lot of the structure of commercial mortgages depends on buyer creditworthiness, total net worth and liquid assets. Terms are always negotiable but as a first-time buyer, you\u2019re going to be getting less favorable terms than say, a large REIT would get.\n\nTo answer specific questions:\n\n1) Yes. Industry-standard terms are 10-year term, 30-year amortization. \n\n2) No, re-fi will not hurt your credit. It anything it will build credit with lenders, who will see a history of successfully retiring debt with re-fi as credit-positive.\n\nSome other things different about commercial mortgages: unlike residential, you\u2019ll pay a hefty price to defease or pre-pay the mortgage. It generally doesn\u2019t make fiscal sense for commercial buyers to pay back early. Although you\u2019ll likely want to take the loan out through a corporate entity, in most cases you\u2019ll need to provide a personal guaranty. You\u2019ll also probably need to pass minimum liquidity and net worth thresholds, which, when I was in the industry, were often NW equal to 100% of principal and liquidity equal to 10% of principal.\n\nBackground: Worked for a while as an analyst for a large buyer of subordinate class CMBS bonds. We also originated debt.\n\n", "replies": [{"id": "e43h414", "text": "Interesting post. \n\nRegarding your comment on NW should equal to 100% principal: does that mean that if I want a 10m dollar loan, I must be worth at least 10m to qualify for that loan? What if the financials are favorable? Don\u2019t they have the asset as collateral? Is net worth that important? ", "replies": [{"id": "e43itsz", "text": "Yes. Your NW must equal the initial balance of the loan. You must also have a liquidity of 10% of the loan amount. Now there are Asset Based lenders or \u201cloan to own\u201d type shops that don\u2019t give a shit what your NW or liquidity is because they only value the underlying collateral. They will bend you over on the rate and you shouldn\u2019t go down that path unless you absolutely have to. ", "replies": [{"id": "e43v0sh", "text": "I see. Does this apply to construction loans as well? Any differences?", "replies": [{"id": "e45ndww", "text": "Yes and they will be more concerned with your track record. PM me for more info. ", "replies": [{"id": "e45nedx", "text": "Will do. I\u2019ll reach out. ", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e43a2vt", "text": "The commercial lender will also do their due diligence to verify the value of the property. If I were serious about buying it, I would want to see the rent roll, recent environmental and building condition assessments, and an appraisal.  There could be a good reason that it's for sale below market.", "replies": [], "depth": 1}, {"id": "e43v249", "text": "I'm skeptical of the \"for sale at below market price\" comment. Commercial property trades on value, heavily weighted based on income, so there has to be a reason why they are selling it below value. Are there major capital needs in the near future? \n\nWhat is the asking price? The advice regarding CMBS loans isn't going to be as strict if the property is below $2 million, there are different lending options. ", "replies": [{"id": "e43vwu0", "text": "That's a fair skepticism. The building is $90k, less than half of what surrounding buildings are going for in the area. It's totally possible that there are some major issues with it which I'm going to try and find out soon.", "replies": [{"id": "e43w24q", "text": "Get a yearly budget. A building like that will be a 10-15% cap rate, so it should be throwing off $9-13.5 thousand per year", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]