How do commercial mortgage loans on real estate work?
Hello. I am buying my first commercial property. I bought it through a seller finance and I have a ballon payment due in a few years. So now I have to get it refinanced with a bank so I can pay the seller and get the deed onto my name. This property I bought I also started a new business (1 space single standing unit property). So the bank is asking for my business financials as well to see if I can make the payments and cash flow in my business. 

My question is- will the bank give me a recourse loan or a non recourse loan? The property the bank said Is worth like 700k and I got it for 400k so the bank can use the property for collateral. Would I still have to personal guaranty it if the bank uses the property as collateral? 

How do these commercial loans work? I hear they give you a 20 year term— but you have to renew every 5,7,10 years otherwise a balloon payment is due at the end. Now if I had to renew at end of 10 years does the loan restart and so I basically owe more interest in the beginning years again??! And what if the bank doesn’t want to renew at end of 10 years bc maybe they don’t like my business cash flow or things changed then I’m due for the whole ballon payment?! And then the bank will have to for close on my property bc I didn’t make the ballon payment all bc they didn’t want to renew? At that point would I be able to say I’ll pay the mortgage out of pocket just renew it— or if my business isn’t strong enough can’t I lease it out to a tenant and show the bank look I can get money? 

Like for normal shopping centers- don’t banks have ti renew the loan every x years and if they see that the tenants can’t pay the loan they will have the ballon payment due if bank don’t wanna refinance? Can someone explain to me how exactly this process works
[{"id": "i1a7s3h", "text": "Most commercial loans of that size will be recourse loans that take into account your business and personal income and debts for their cashflow. You should be able to go up to 20-years on the amortization and the 5, 7 or 10 year balloon is accurate (5 being most common). \n\nMost places would have every intention of renewing at the end of the balloon even if your cashflow is worse off if you are considered a \u201cgood\u201d borrower/member and depending on the type of place but you\u2019d also be given some heads up if they weren\u2019t going to renew to try and find other options. But there\u2019s always that risk they call the note due if you\u2019re in a bad spot just like with any other type of loan.", "replies": [{"id": "i1a8iw5", "text": "Oh I see. Yea they are asking for my personal income credit and cash flow of business. But why do recourse loan? I don\u2019t want this affecting my personal credit if a ballon payment is due and it gets foreclosed. Or they coming after my income. The property itself is worth more than the loan I\u2019m borrowing why don\u2019t they just use that as collateral?? That\u2019s more than enough isn\u2019t it?", "replies": [{"id": "i1a9jwo", "text": "Most lenders aren\u2019t collateral based lenders, they are cashflow based lenders. Not to mention, non-recourse loans are much riskier then recourse loans so unless your business is insanely strong both from a consistent cashflow level for many years as well as having a lot of liquid assets with that lender as deposits, no commercial lender is going to want that risk of non-recourse without taking a pound of flesh from rate and fees.\n\nAt my FI we only reserve non-recourse for borrowers that we consider to be \u201cA\u201d borrowers in our market, and then not even all are allowed to go that route. Their cashflow is extremely strong both globally (we still review a global cashflow even for non-recourse) and business specific. They usually also have a lot of cash deposits with us and we consider them \u201cfull-service\u201d type. This probably takes up less then 5% of our entire portfolio on commercial loans. \n\nNon-recourse loans just aren\u2019t common at the small business level that you\u2019re talking about when using traditional banks/credit unions.", "replies": [], "depth": 3}, {"id": "i1aae6o", "text": "Your liquidity and assets are not large enough for the bank to feel comfortable giving you non-recourse debt. The fact you needed a land contract is a red flag to them so you\u2019re facing an uphill battle here. \n\nIt usually takes several properties and/or \u201cX\u201d of reoccurring net income of \u201cX\u201d amount of assets, as well as an impeccable relationship with a lender, for them to start feeling comfortable enough to begin offering you non-recourse debt. It could be millions you\u2019re talking here depending on the institution in which you\u2019re banking and or asking for capital. \n\nThis comment is spot on. You may be able to qualify for an owner occupant loan. This deal is tough since this is a land contract. I\u2019d ask the seller if they could set up a new LLC, and have them transfer you an interest of equivalent to however much equity you have into the property via your land contract. I\u2019d then set up a new LLC with your business and if this is already done, I\u2019d have your business sign a lease with the LLC you set up with your seller, take the lease to the bank, to help qualify the property income that way. I\u2019m not sure how your current land contract is set up in regards to who\u2019s responsible for what but I\u2019d try and make the lease as LL advantageous as possible. Basically all you\u2019re doing here is trying to make the money you pay the seller as a note, more so as a lease, and then have the seller give you an interest in the property, so that the bank sees this property as an income producing property with you as some sort of partner in the ownership of the property. Make sense?\n\nIf you\u2019re lucky, you may be able to get a 15-20 year am with a 5 or 7 year term. Rates probably in that 5-6% range. \n\nYou\u2019re correct in your assumption of the way commercial loans work. That was a real ass kicker in 07-08-09 l. Banks were calling notes due with term left because they could. It\u2019s why many LL\u2019s lost their asses. \n\nGood luck but get realistic with the banks perspective. Lenders don\u2019t like commercial real estate loans on their books. They\u2019re relatively risky to them and it takes away from their borrowing power to other assets.", "replies": [{"id": "i1abw4c", "text": "Thank you! Yes I already have an llc set up and have a lease between my business and llc. The seller contract states that I am to pay mortgage payments and real estate taxes and I owe him the final balloon payment in a few years. The deed and title  is with the lawyer in escrow once the final payment is given then the title will be transferred over. We already put the down payment down with him. \n\nSo I don\u2019t understand how hotel owners are getting non recourse loans? \n\nSo I\u2019m basically guna get a recourse loan personal guarantee based on my income (bc I have no other property or house- just one other leased business) \n\nI talked to the banker he said he\u2019ll give me a 5.5% rate and he knows this property and likes it so he\u2019ll give me the loan. I\u2019ve made improvements on it so he said he\u2019ll add the value and appraise it. And I believe someone asked him about putting up house as collateral or soemthing and he said no not needed. So I\u2019m not sure what the underwriting process will say", "replies": [{"id": "i1ad7z7", "text": "Yeah the deed and title aren\u2019t yours so that\u2019s where they\u2019ll sit until the final payment has been received and escrow is closed. How are they getting non recourse debt? Easy - it\u2019s how I described it. If that scenario doesn\u2019t describe their situation than whoever is telling you it\u2019s non recourse debt is lying. \n\nBut good it seems you\u2019re on your way and yes that\u2019s how it\u2019s going to have to be. My suggestion was basically just to make those mortgage payments lease payments with you as some sort of beneficiary if the seller is agreeable to that. \n\nIf you\u2019re in your lenders shoes, why would it be any other way? There\u2019s a reason CRE is the biggest and hardest game to get into and financing is one of those hurdles. It\u2019s hard to Jump through on your first couple deals but once you get going, debt and leverage will become your friend. \n\nUnderwriting process will be a blend. Income and cost comparison. I suggested to get Lease as LL advantageous because income method will be Income - expenses divided by cap rate. Comps will just be whatever is comparable on a per square foot basis. Owner occupant loans may help you qualify for better terms.", "replies": [{"id": "i1affb3", "text": "Gotcha! Thank you so much. And as far as the personal guarantee- let\u2019s say everything goes down- I can sell the property to pay back the lender or I can rent out the property and get the new tenant to pay the rent/mortgage. So I have those 2 options available to make it work. \n\nWorst case is they foreclose on my property and try to collect payment from me/my job income? Or one or the other? And then it\u2019ll destroy my personal credit if they foreclose or try to collect on my job or money I have saved up. \n\nJust want to my know options on a personal guarantee and if this a good/ worth it risk since it\u2019s a property", "replies": [{"id": "i1ahddm", "text": "You\u2019re just personally guaranteeing the loan. Just like a personal guarantee on the lease. In this case, you better hope you\u2019re able to pull it off because if for some reason you default on the payments, in your scenario, it would mean your business is no longer making money and you would have a bigger problem to worry about. \n\nSkin in the game is what they\u2019re looking for here. If the LLC that owns the property declares bankruptcy and you are the managing member of that entity, the bank will seize the asset and it\u2019ll go into a receivership scenario with the bank which is basically a judicial foreclosure of CRE assets.", "replies": [{"id": "i1aicd0", "text": "I understand- if my business fails and I can\u2019t make the lease payments to my llc holding which pays the bank. I\u2019m confused. So if that happens then my LLC will declare bankruptcy and the bank will take possession of property and foreclose? And if my llc declares bankruptcy does that affect my personal credit? \n\nI\u2019m personally guaranteeing the loan but if my business fails then what are my options? Since I personally guarantee do the banks come after my savings? Can I sell the property or put in a new tenant that can make the payments? Do I file bankruptcy on my LLC and the bank forecloses? What is the process in this scenario and how would my personal credit be affected?", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}, {"id": "i1agewo", "text": "Also the bank didn\u2019t ask for the lease between my llc and business. They just asking for business tax return and cash flow. Does it matter should I show them the lease?", "replies": [{"id": "i1agug2", "text": "The lease between you and the business will not matter for this. That\u2019s just liability protection for you. The lease that will matter here will be between your business and the property owner.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i1ab3sg", "text": "Pretty much all of us who buy smaller commercial properties have to personally guarantee the loan.  It's just how it is.   Are you working with a smaller local bank for the loan (imo you should be.)  Like a local 2-4 branch bank or credit union.  Also you can get a quote from a commercial loan broker who works with many different underwriters, to make sure you're getting a good rate.\n\nYou already have a lot of equity in the property, which is wonderful for you.  You will always be able to get a loan on this property as long as you are making some money in your business.  If it's worth 700K and you get a loan for 400K right now, you'll be at 57% debt to value on the property.  Most banks will lend up to 70, 75, or occasionally 80%.\n\nAssuming the bank you work with will lend to 70%, you could ask about a commercial line of credit on the 13% equity you have (the difference between 57% and 70%.)  This would mean you could get a credit line for $91,000.  That line could come in handy someday if you are ever in a cash crunch in your business or just want to use it to invest in something else.  Good luck!", "replies": [], "depth": 3}], "depth": 2}, {"id": "i1a8ra3", "text": "Also. So after every 5 year renewal do I start paying more interest again? Is there ever a time I get to pay down my principal more than interest. Or that\u2019s not the case for commercial loans", "replies": [{"id": "i1a9r16", "text": "Normally at the renewal period your amortization would come down, so if you started a 5/20, after 5 years it\u2019d be renewed at 5/15 so yea, you wouldn\u2019t be reamortizing the loan each time and continuously paying more interest.", "replies": [], "depth": 3}, {"id": "i1aaymo", "text": "You need to set up meetings with a lender. If you don\u2019t know the ins and outs and the intrinsics of how financing happens on the commercial level, it could decimate you financially.", "replies": [{"id": "i1auq8y", "text": "This is 100% correct, each lender will do things differently but for the most part, the core principal will be there with all. But reach out the local lender at a bank/Credit Union, maybe even 2 and ask questions on their process. Always best way to go is asking the person you\u2019d be working with directly these questions.", "replies": [], "depth": 4}], "depth": 3}, {"id": "i1d9ujj", "text": "you may want to read over your term sheet because it varies and everything you inquired about would be outlined. Seems like YOU have committed to a balloon mortgage when you shouldn't have. There are benefits but doesn't seem like you were thinking long-term. none the less, there is the secondary debt market should you require a bailout without losing your assets and principal investment", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i1a8sil", "text": "*\"This property I bought I also started a new business (1 space single standing unit property). So the bank is asking for my business financials as well to see if I can make the payments and cash flow in my business.\"* This is standard for single-tenant, owner-occupied commercial real estate. The primary source of repayment is the cash flow of the business, since they are the only one paying rent. So, they will underwrite to your business's ability to cover debt service payments.\n\n*\"My question is- will the bank give me a recourse loan or a non recourse loan?\"* Different banks have different philosophies on this. Most prudent lenders will require some form of recourse whether it be you personally or the corporate guarantee of the business. Depends on your credit quality, which I cannot assess from this post to be honest.\n\n*\"How do these commercial loans work? I hear they give you a 20 year term\u2014 but you have to renew every 5,7,10 years otherwise a balloon payment is due at the end. Now if I had to renew at end of 10 years does the loan restart and so I basically owe more interest in the beginning years again??!\"* The payment is principal &amp; interest based on a 20-year payback period (amortization) but the loan will mature in 5-years. If renewed, you will continue paying based on a 20-year amortization and the rate will be based on the market and your credit quality at the time of renewal. You will not \"owe more interest\" as if the loan was starting over. Banks typically provide an amortization schedule at closing that will help you understand your payments better.\n\n\" *And what if the bank doesn\u2019t want to renew at end of 10 years bc maybe they don\u2019t like my business cash flow or things changed then I\u2019m due for the whole ballon payment?! And then the bank will have to for close on my property bc I didn\u2019t make the ballon payment all bc they didn\u2019t want to renew? At that point would I be able to say I\u2019ll pay the mortgage out of pocket just renew it\u2014 or if my business isn\u2019t strong enough can\u2019t I lease it out to a tenant and show the bank look I can get money?\"* If your business struggling and you cannot make debt service payments, they will first ask you to refinance elsewhere and give you a let's say 90-day short-term renewal. If you can't obtain other financing, they move you special assets and try to work with you on and provide an alternative payment plan. If ultimately you are unable to refinance or repay through alternative sources of cash flow or other personal assets that you can use for liquidity, they will foreclose and sell the property. Most banks will work with you and do everything they can to help, because the cost of foreclosure and potential loss of principal hurts their profitability.", "replies": [{"id": "i1aa5sa", "text": "Omgg this explains everything thank you so much!! \nAs far as the recourse non recourse - I can guarantee my business and the real estate llc. Isn\u2019t that enough since the property is worth more than the loan itself? I hear people who buy hotels they get a non recourse loan. I just don\u2019t want it affecting my personal credit In case shit goes down. I have a high 780+ credit score and decent income from my job. And do I have to sign a personal guarantee for recourse loans (does that mean I have to pay them back with my income or that I use my house or another property as collateral and the bank can use that? Bc I honestly don\u2019t have a house or another collateral). And do I have to sign a personal guarantee for NONrecourse loans? Just confused on the two.", "replies": [{"id": "i1abq9e", "text": "*\"As far as the recourse non recourse - I can guarantee my business and the real estate llc. Isn\u2019t that enough since the property is worth more than the loan itself?\"* This is between you and your bank. Shop the loan around to different lenders to see who will be willing to not require a personal guarantee. \n\n*\"I hear people who buy hotels they get a non recourse loan.\"* Hotel lending is a totally different beast and isn't really comparable in this situation. \n\n*\"And do I have to sign a personal guarantee for recourse loans (does that mean I have to pay them back with my income or that I use my house or another property as collateral and the bank can use that? Bc I honestly don\u2019t have a house or another collateral). And do I have to sign a personal guarantee for NONrecourse loans? Just confused on the two.\"* Yes you will sign a guarantee agreement if it is recourse to you personally. If it is non-recourse to you personally, there is no requirement to sign. \n\nJust curious, do you own the business that occupies your building 100%?", "replies": [{"id": "i1acagh", "text": "Yes I do. Both the property and business we are in partnership.", "replies": [{"id": "i1d9vik", "text": "as far as the personal guarantee goes.. maybe you set up a corporation to hold title to the asset but that corporation may not have any credit history, in this case, the lender would want to see some form of indemnification--but not necessarily a personal guarantee.\n\nWhen you say you are a \"partnership\", this means that an individual of that partnership or corporation needs to \"own\" the property on the title. Partnerships cannot acquire real property, but you can have a supporting contract that dictates how the asset is taken care of.\n\nThe bank will ammortize your debt but", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i1atevs", "text": "What do you mean \u201cget the deed into your name\u201d was this a contract for deed? What state are you in?", "replies": [{"id": "i1au9k8", "text": "IL. we signed with seller for seller financing we owe x amount ballon payment end of term. Have to refinance by then. The deed and title in escrow until then.", "replies": [], "depth": 2}], "depth": 1}]