Are SBL loans basically a trap to keep you with the lender?
We have a Freddie Mac Small Balance Loan on a 16 unit mixed use building in a small metro area. At the time of purchase, we were grateful for the program, but our refinance window will be here this summer. The building is worth around $2.5M, we owe $1.4M, current rate is 4.1%, and we have around $200K in the operating account because our master plan was to pay down the mortgage during the refinance.  Our loan has a declining pre-pay penalty, from 5% down to 1% now.

If we refinance with Freddie Mac, the 1% penalty is removed, the new mortgage is recorded as an assignment which avoids our state's mortgage recording tax. But, all the SBL programs amortize at 30 years, so while the monthly payment goes down, it adds another 5 years to the note, which has never made a ton of sense to me, although my CPA thinks it's terrific.

If we refinance with a local bank, between the penalty and the mortgage recording tax, it costs $30K! But, I can get 15-25 year amortization and a 10 year lock on the rate and some hope of paying off the building before I am gumming my food.

I would be interested to hear of other's perspective on this, or if their might be other options I have not considered.  We have considered a sale and 1031 exchange, but inventory in our area is very tight for a similar property and I do not have a lot of confidence in making that happen.

EDIT: On our current SBL and I would assume from term sheets I have seen, paying additional principal triggers the prepay penalty. In our case, 5% the 1st year, and currently 1% at year 5 THROUGH the maturity date, which is 2036. 
[{"id": "glzhaqk", "text": "2 extremes for financing strategy- maximize cash flow with longest amortization and cash out at every opportunity.  Or... and this weird so hear me out, pay back the loan. \n\nLenders (or any company) want your business forever. This kind of deal isnt uncommon. $30k is prob 1-3 months of gross income, so looked at from a \u201cFreedom point\u201d perspective- Add it to the balance and refi w quickest route to paid in full. Btw, rate doesnt make much of a difference in payment on 15 year amort notes. On a 25 or 30, there are much larger swings. Use a mtg calculstor and price out 15 year mortgages and just change the rate by .125 each time and do the same with a 30", "replies": [], "depth": 1}, {"id": "glzm0y1", "text": "Why not take the 30 yr SBL deal and pay it like a 15 or 20 year? Then if shit hits the fan you can only make the smaller 30 year payment.", "replies": [{"id": "glzuwf2", "text": "Because of the prepay.", "replies": [{"id": "gm0c9jm", "text": "Could prepay be negotiated away? May need pay a slighter larger interest rate but may be worth while if Op really wants to finish paying off sooner", "replies": [{"id": "gm1wrnp", "text": "Sure it can, but this depends on the lender. On some loans I allow partial prepayment of principal, up to a certain % or $ amount, others not so much. Of course this needs to be negotiated ahead of signing any loan docs.", "replies": [], "depth": 4}], "depth": 3}, {"id": "gm0peh8", "text": "There is no such thing as a 15 year pre pay.  And prepays can be bought out anyways.  And 20% of principal per year is usually the cap.", "replies": [{"id": "gm1wc9n", "text": "Ever heard of full commercial defeasance? Yield maint is standard for many lenders.", "replies": [{"id": "gm1y3nz", "text": "Yes. I can see a hard or soft prepay but paying off pieces of principal shouldn't matter.  It's not like the loan is recasting.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "glzm9ot", "text": "It's not a trap to keep you with the lender. I work for a Fannie/Freddie lender and frequently refinance people out of Freddie Mac loans into Fannie Mae loans and vice versa. \n\nAre you sure there is not an \"open at par\" window on the loan? It's usually the last 3 months before maturity.\n\nAnd your CPA thinks it is terrific because you can keep borrowing against the property and receiving tax-free proceeds from a refinance to roll into other investments.\n\nMy advice would be to explore Fannie Mae's small loans program which allows you to do a 30-year loan with 30 year amortization so the loan is paid off at the end of the term (which it sounds like you are looking for). Your rate will be higher than a 10-15 year loan but you're locking in the rate for 30 years and will eventually have the loan paid off completely.", "replies": [{"id": "gm0tdlm", "text": "Our only window is after year 5 where it stays at 1% until maturity, which is 2036.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gm0e019", "text": "You\u2019re complaining about being able to get a better loan?\n\nA 30-year amortizing loan is preferable to a 25-year amortizing loan.\n\nWhat are the repayment restrictions of the 30-yr loan you could get?", "replies": [{"id": "gm0rnbi", "text": "5% to 1% declining annually on our current loan, 10% to 1% declining annually on current term sheets, all on 30 year amortizations.", "replies": [{"id": "gm14kaj", "text": "So you at no point would the prepayment penalty burn off?\n\nDo you know what rate you could get with the refinanced SBL?", "replies": [{"id": "gm16hls", "text": "The 1% prepayment penalty lives on until 2036 in my promissory note. \n\nTerm sheet I saw last week from Freddie Mac were 3.5%, 10 year window, 30 year amortization. \n\nIf 6 month LIBOR stays where it is for a while, my current loan would adjust down to 3% or so over the summer.", "replies": [{"id": "gm3dgvx", "text": "Your term sheet was 3.50% for 50% leverage? That doesn\u2019t sound right... are you going through a mortgage broker or with a direct lender?", "replies": [{"id": "gm3vnez", "text": "It was not personalized for us, just what the agency was offering for refinance, it's up to 80% LTV with an appraisal. \n\nThat's another thing..... They did my last appraisal, so if I stay with them, they will update the appraisal instead of a new, $5000 appraisal.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gm0h48i", "text": "Freddie will happily decrease the amortization and loan term if you ask them to. \n\nThey are a offering a 30 year amortization schedule in order to seem more attractive because it improves your cash low. Shorter amort decreases the lenders payoff risk so they will allow it. It might even improve your rate.", "replies": [{"id": "gm0qp5v", "text": "This, just ask for the 25 yr amort ...and do yield maintenance instead of stepdown prepay and your rate will be lower, then take 1-2 yrs of IO and cash flow!", "replies": [], "depth": 2}], "depth": 1}, {"id": "gm0nuex", "text": "Have you been quoted any requirements to escrow P&amp;I for a year or any other reserves due to COVID?", "replies": [{"id": "gm0suy7", "text": "Noone has brought this up that I've spoken to, but I've heard about it. We have not heavily leveraged, maybe an average of 50% LTV. This is our least favorable loan at the moment.", "replies": [], "depth": 2}, {"id": "gm2ihhw", "text": "Freddie is 12 months P&amp;I reserve, Fannie is 18 months. Also lenders want verified liquidity equal or above 9 months of debt service.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gm0p3tq", "text": "Just bear with this line of questioning:  \n\nThink about this.  You have two loans.  Both with the same balance and interest rate.  Loan one is 20 year amortization. Loan two is a 30 year am.  Which is the better deal?  \n\nThey're the same loan.   \nIf you make the 20 year am payment on the 30 year loan, the 30 year pays off in 20.  \n\nSo when you talk about 'adding years', that's really a cop out.  What would the new loan with the 'added years' payoff in if you were paying the current P&amp;I payment.  That's the real question. If it's less time than your current loan, then you're winning.", "replies": [{"id": "gm0t4cg", "text": "The day I pay $1 of additional principal, 1% of my loan balance becomes a prepay penalty, and if I'd paid that extra $1 five years ago, it would have been 5%.", "replies": [{"id": "gm0touu", "text": "I don't think you read your loan docs right.", "replies": [{"id": "gm1dc9n", "text": "Agencies won\u2019t allow extra principal payments, it\u2019s standard language in their multifamily docs.   Borrower can either pay the loan as agreed or pay the entire loan off, which would trigger the prepay penalty.     I\u2019m surprised their isn\u2019t a 90 day open period at the end of the term, but I know SBL is a different beast than the conventional agency MF deals.", "replies": [], "depth": 4}], "depth": 3}, {"id": "gm1bmlq", "text": "That\u2019s interesting. I have never heard of a loan that had a prepayment penalty written that way. The penalties usually terminate after the 5th year. If what you describe is accurate, it seems pretty unfair IMHO", "replies": [{"id": "gm2jhl2", "text": "Every SBL Agency loan I\u2019ve underwritten in the last 2 months has had Yield Maintenance for the loan term -6 months, three months of 1% penalty, 3 months of no prepay. Mind you, this is for one client. But it\u2019s pretty common to have prepayment penalties until the last year or so of the loan.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gm1o62e", "text": "Why repay the loan quicker?  Improve the cash flow and invest it. Heck as long as the rates are low and the lenders are willing cash out at every refinancing opportunity and invest the funds.  \n\nCashing out the equity in the form of additional debt is not a taxable event. Selling unless you do a 1031 is a taxable event. You can make more investing than 4.1%", "replies": [], "depth": 1}, {"id": "gnz7myr", "text": "I'm late responding here, but did you come to a conclusion on how to proceed? I'm an SBL lender and would be happy to walk through how to set up a more favorable structure. Freddie has some convenience there where you can pick and choose features, to an extent.\n\nIf you're thinking about refinancing with a bank, they can structure a payoff by assignment to avoid the mortgage recording tax (that's not limited to Freddie Mac refinance only). If they're not familiar with the process, a good lender attorney can take care of the documentation. Your current servicer might be able to put you in touch. A good title company may be able to assist there as well.", "replies": [], "depth": 1}]