5 Year Fixed Rate on Commercial Loan; Forced Default if Rates Go Up?
Hi all, I've been a bit nervous recently since I am closing on a 6 unit multifamily deal which has a 5 year fixed rate of 4.75%. Furthermore, future rate increases are capped to a certain percentage (2.5% - every 5 years).

As rates are going up over this period, will my commercial lender try as hard as they can to put me in default, so they can exit the loan? Or do they typically stay honest (even though the market rate might be much higher than the current fixed rate)? 

Just want to make sure I won't be forced to sell or payoff this loan. I have no intention of defaulting of course, but the docs give them a lot of power - e.g. if they believe themselves to be insecure, they can call a default, even if I am making my monthly payments.

Thank you!
[{"id": "i908n6j", "text": "No lender wants to put someone in default. They would only do that if you failed to uphold your end of the agreement by missing payments or not following other covenants.\n\nAll lenders regardless of commercial or consumer have strong language in loan docs to protect the FI and their members (CU\u2019s) or stakeholders (Banks).", "replies": [], "depth": 1}, {"id": "i9090kx", "text": "A reputable lender certainly won't\u2014though possible they would be more stringent about enforcement. Keep in mind though, a couple of months ago they were probably lending at 100 bps lower than that. You'd be low on their list even if you're paranoid about it.\n\nWhat do you mean, \"if they believe themselves to be insecure, they can call a default\"? What kind of actual language is in the loan agreement? That sounds insane. Is this a major lender or a small bank?", "replies": [{"id": "i90wn62", "text": "That is super common language in loan docs\u2014possibly even standard. However, if they called your note for bs reasons and you had the cash to sue, their argument might not hold up on court. \n\nAny legit bank isn\u2019t going to call your loan unless you\u2019re behind on payments and are not working with them to remedy the situation. In which case it\u2019s entirely reasonable to believe themselves insecure, foreclose, and try to recoup their money before their collateral position worsens.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i90ehbi", "text": "Do you have any idea how many loans are in default right now?\n\nYou make money in real estate by understanding the entire game is political, from zoning to the legal political construct we call money.  \n\nPeople made a ton of money after the Nixon Shock.  The next decade will rhyme.", "replies": [], "depth": 1}, {"id": "i90gknw", "text": "Your lender is in the business of renting money.\n\nRead (and understand) the terms of your loan.  \n\nPay your rent on time.", "replies": [], "depth": 1}, {"id": "i90ipvw", "text": "Thanks everyone. To clarify, there is a default clause in the docs that states the loan is in default if \"Lender in good faith believes itself insecure.\" My attorney said this is fairly standard practice, but I wanted to make sure they can't use this just to get out of a low interest loan.\n\nSee here for some details: [https://www.bizjournals.com/atlanta/real\\_talk/2011/10/is-insecurity-in-the-eye-of-the.html](https://www.bizjournals.com/atlanta/real_talk/2011/10/is-insecurity-in-the-eye-of-the.html)\n\nThis is a local credit union, located in the same market as the subject property. I live out of state.", "replies": [{"id": "i90u6ob", "text": "FYI, for next time, this is negotiable. At a minimum you should be able to insert or amend language giving you opportunity to cure the default. I just closed a loan where the templates for Personal Guaranty and Security Agreement had somewhat onerous default provisions with no cure option, way beyond the negotiated Note and DOT. We were able to strike a number of the provisions and get reasonable cure rights on the rest.", "replies": [], "depth": 2}, {"id": "i90yvc7", "text": "If you want to start negotiating doc that's fine. You'll be paying for the banks attorney as well as yours to do so.\n\nAlso be prepared to get nowhere. Every clause in those documents is there for a reason to protect the lender not you.", "replies": [], "depth": 2}, {"id": "i91m6ex", "text": "Interesting. I\u2019ve negotiated and structured probably $3B of mortgages and have never seen this language - frankly if I tried to put this in, my clients would laugh at me and I would never get another deal from them. But I deal with UHNW guys and institutions, so every clause is under negotiation (legal expenses end up being $100k+).\n\nThis seems terribly subjective - I would push as hard as you can to narrowly define Lender\u2019s basis for determining insecurity (if you can\u2019t get it out completely). Start talking to other lenders too if you need negotiating leverage - your strongest move is to get up from the table.", "replies": [{"id": "i92mcjy", "text": "I feel like you have a different experience than most since you\u2019re dealing with UHNW individuals. Both parties can afford attorneys to hash out what makes sense for everyone. For your \u201cMain Street\u201d lenders who are doing small loans (on average) it often won\u2019t make sense to customize docs for each individual. I only very rarely do, and it\u2019s only for deals where the note size warrants some flexibility. Most often it\u2019s a take-it-or-leave-it scenario, because a majority of our competition will have similar or identical docs. Most of them use the same small handful of loan doc software with standardized language.", "replies": [{"id": "i93rb87", "text": "You\u2019re probably right. I\u2019m just not in that space. My average deal size when I was doing mortgages was like $100M", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i93krjk", "text": "A federally insured bank will avoid default at all costs - they face regulatory issues and increased capital requirements when they foreclose on properties.\n\nPrivate lenders and debt funds have the ability to foreclose on properties without facing the downsides banks have. They can absolutely engage in quasi-predatory lending practices since they\u2019re lending to investors rather than consumers. Careful who you accept money from.", "replies": [], "depth": 1}]