Loan question about first commercial property
Hi all, first post here in this sub after a lot of lurking. So my situation is, I am buying my first property. It is a small shopping center with 4 tenants. I wanted to go over the loan details with you all and make sure they are normal.

I am paying about 400k down

Loan amount is 1,100,000

Maturity of 5 years

Amortization of 20 years

Interest rate at 5.25%


I am not working with a broker because the seller is a friend and he is handling the transaction. Any input on how these terms are? Should I negotiate with the lender? Can I renegotiate after 5 years and get another loan on the remaining principal that will be due. Thanks in advance.
[{"id": "g9bn62f", "text": "Rate is extremely high for a 5 year term secured by real estate. What is the appraised value of the property? Does the purchase price include the convenient store assets? Have you done research on the remaining tenants and their ability to pay rent? I wouldn't touch a retail shopping center with a 10 foot pole at this time. \n\nI wouldn't use your \"friend\" who is selling you the property to find you financing as he sounds like he is taking you for a ride selling you a potentially distressed property and business. \n\nI manage a commercial banking team for a large financial institution and we wouldn't even remotely consider underwriting this deal at this time.", "replies": [{"id": "g9bs5x9", "text": "They property is in a highly dense area with a lot of foot traffic. The other three tenants are two restaurants and a notary/insurance shop. The property has been there for 25+ years, remodeled recently, I see a lot of potential is in the convenience store which has full grocery and meat market inside as well as check cashing and money transfer services. \n\nIf the rate is too high, would you recommend I see another lender or ask them to possibly lower it?", "replies": [{"id": "g9btzu5", "text": "Honestly with that information I would now run not walk away. Two restaurants and a check cashing business?!?! For a standard deal yes the rate is too high but honestly it sounds like they are pricing in the risk associated with the transaction. I would go to a few other banks to see if they can beat the rate or would even move forward at all. That will give you an indication on where the market is. \n\nHonestly on my team this deal would be a non-starter.", "replies": [{"id": "g9bw6kl", "text": "Appreciate all the advice, thank you! I will check out another lender to compare.", "replies": [], "depth": 4}, {"id": "gg3o86c", "text": "Hey I\u2019m looking at a small local strip mall that\u2019s about 350k.  It\u2019s 4 units. Total rent 4500 a month. The renters are mom and pops that have been there for a few years 1 is a art studio and mma gym.  The other 2 is more recent, it\u2019s a beauty salon and female products shop.  I think it should be okay but wanted to get your opinion.  Thank you.", "replies": [], "depth": 4}], "depth": 3}, {"id": "g9dhfwg", "text": "I work for an under $10 Billion bank lender. Our rates for Commercial Real Estate range between 3.75% to 4.50% depending on the property, and sponsor.  But we would not do this. There is 0 appetite for retail and minimal for office/industrial unless we have strong tenants.  \n\nI would shop it around, but honestly a lot of people will not entertain lending to this property.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g9bpc3i", "text": "The loan terms sound typical for a small property. It\u2019s impossible to know if you are paying too much without a lot more information. If you are financing through a reputable lender with all required underwriting, it\u2019s much more likely to be a decent deal. If the seller is financing, you need a disinterested third party to help you evaluate the deal.", "replies": [], "depth": 1}, {"id": "g9bqoo6", "text": "How much research have you done on this property? Have you determined the CAP rate and compared that to similar properties? Have you reviewed leases? Rent roll? All this and more drives the price. \n\nI'd also post at r/CommercialRealEstate.", "replies": [{"id": "g9bxh5r", "text": "isn't that where we are?", "replies": [{"id": "g9bxy6a", "text": "oh. Duh!", "replies": [{"id": "g9cr27w", "text": "lulz", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g9bvyaq", "text": "What was the property appraised for? What is the rent roll? When do leases expire? A lot more need to be known.\n\nYes, you can renegotiate at maturity, banks structure loans like this so they can keep negotiating every few years, they don\u2019t expect you to actually make the balloon payment. As your first property idk how much lower you can get the rate, commercial real estate is all about experience.", "replies": [{"id": "g9bxuy4", "text": "Thank you for answering the questions! Good to know they don\u2019t expect me to make the balloon payment. The appraisal hasn\u2019t been made yet. That is the next step after the loan details are sorted out.", "replies": [{"id": "g9cdt2d", "text": "If you were simply purchased the property as an investor what is the market rent for the convenience store? I'd do some independent legwork on this number, add some sort of vacancy factor, and then see if you still like the levered property returns. This is also how the lender is going to view the deal if it's secured by the RE. The store might turn out to be a great business however you may find that you like it better as a tenant.", "replies": [{"id": "g9e277f", "text": "I pay around $6k in rent for my current convenience store about 3 miles from this property and it is a lot less sqft. So I would say this would rent out at $6-8k.", "replies": [{"id": "g9e280e", "text": "3 miles is 4.83 km", "replies": [], "depth": 5}, {"id": "g9edofa", "text": "[loopnet.com](https://loopnet.com) go look at nearby listings of the property you are purchasing. 3 miles away is a decent amount of distance, retail landscape can change a lot in 3 miles and as such the rents can change a lot as well. \n\n&amp;#x200B;\n\nIs your 6k rent you pay including utilities, and \"CAM\" (property insurance, property tax , etc.\"). 6k rent sounds nice for a landlord, but if 2k of that is operating expenses, the actual profit is 4k", "replies": [], "depth": 5}, {"id": "g9f78h8", "text": "Makes sense, so if you add this to the rent for the other three and subtract operating expenses (all annual) you will get to the net operating income. Divide this number by the $1.1M purchase price to get the going-in CAP rate. You might also talk to a few other store owners to get a feel for what they are paying, including expenses.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "g9ce1uw", "text": "They fully expect you to payoff the loan at maturity, if you don't - barring any built-in extension options - you'll be in default and paying exorbitant default interest and fees and possibly foreclosure.", "replies": [{"id": "g9clj1u", "text": "They expect you to refinance/extend with them or refinance with another bank. This is how the loans are structured, it is unreasonable to think most people can afford the balloon payment, so the short maturity allows both parties to come back to the table... if the bank likes you they will say let\u2019s refinance this, and if they don\u2019t like you they will nudge you to get it refinanced somewhere else. That\u2019s not to say you aren\u2019t on the hook for the balloon payment, it\u2019s just unlikely they would demand it. They don\u2019t want to take collateral if they don\u2019t have to.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g9c10w8", "text": "I work for a CU in commercial lending as an underwriter. Pretty much anything RE secured we're offering between 4.00%-4.50%. We do a 180/240 but it's a 5/1 rate structure.\n\nIf the term on the loan is 5 years (60 months), you will be on the hook for the entire principal balance at that time. You can pay that off by refinancing with another lender or your current lender may just extend the loan with you for another 5 years.", "replies": [], "depth": 1}, {"id": "g9cdktx", "text": "5.25 at 73% LTV sounds reasonable, you might be able to cut the debt service down slightly if you put down an additional $50k but unlikely they go much lower. You can shop around to other lenders but unless you have a relationship somewhere terms wouldn't be more favorable.", "replies": [], "depth": 1}, {"id": "g9ckbjo", "text": "I would shop around for better terms if I were you. There might be better terms that you can get. Also, look into cost segregation once you close escrow. The acceleration might save you more money as well. Best of luck!", "replies": [], "depth": 1}, {"id": "g9cnbd7", "text": "Damn. Shop around on that rate. I just bought commercial , 25 year ammor, 5 year term @ 3.85%.", "replies": [], "depth": 1}, {"id": "g9cnww8", "text": "Bank wants to get paid off after five years. Any renegotiation is separate. They don't care if you refi, sell your kidney, lose your house, or show up with a bucket of money. You don't pay-they take it. You will get \\*nothing\\*, because they will drown you in fees and penalties and suck away all your equity.\n\nAlso-you might have loan terms that require a certain amount of vacancy. Having TWO restaurants could turn out to be a disaster-or it could be awesome if they come out of this doing well.\n\nAlso I don't know your experience with convenience stores. Its nice you will be hands-on, but I don't know the P&amp;L or anything about the store.\n\nDo NOT do this as your first deal unless there is some magic here that is not being shown.\n\nMaturity/Amort term/rate seem alright, esp for a small property.\n\nAnd the seller-here or anywhere else- is \\*never\\* your friend.", "replies": [{"id": "g9e2l4g", "text": "Thanks for the tips! Family has 30+ years of c-store experience but never owned any of the properties, always been renting.", "replies": [], "depth": 2}], "depth": 1}, {"id": "g9cofg4", "text": "I'm a credit trained loan officer who specializes in owner occupied real estate. These are the questions you need to be able to answer before you can make a decision:\n\nWhat is the property worth? Is that the \"sticks and bricks\" value or is that based off the in place cash flow.\n\nHave the tenants made all of their payments during covid? I would need to see bank statements confirming the payment history. \n\nWhat is your experience in the convenience industry? \n\nWhat's your breakeven for the first year? year 2? \n\nDo you have a business plan? \n\nWhat percentage of the square footage are you going to take up with your business? If you're over 51% you could qualify for an SBA 504 loan, rates are  at 2.65% right.\n\n\nWithout more information its impossible to say if this is a good deal. There are things you can do to improve the odds of it being a successful business venture.\n\nI would HIGHLY recommend reaching out to your local SBDC (small business development center) for free business consulting paid for by the Small Business Administration. There are hundreds of them all throughout the country, use this link to find the closest one.\nhttps://americassbdc.org/", "replies": [], "depth": 1}, {"id": "g9cogq4", "text": "Who drafted your PSA? What\u2019s the cap rate? Seems like it should be a okay deal", "replies": [], "depth": 1}, {"id": "g9dbdg9", "text": "Interest rate definitely seems high, my team recently closed on a property in NJ 2 weeks ago at a rate of 3.625% on a 7/20 loan.", "replies": [], "depth": 1}, {"id": "g9dkedc", "text": "Ask about floating rate pricing.  Something like LIBOR + 250.  In addition to the rate, you could ask for an interest only period, say 3-years IO, then 30 year ammo. Most importantly, what's the recourse?", "replies": [], "depth": 1}, {"id": "g9dr2vx", "text": "Interest rate is too high. My firms offers much less. Definitely shop around to save money. Why pay more than needed? Best of luck.", "replies": [], "depth": 1}, {"id": "g9fqv7r", "text": "As already said, your rate is too high. Use this as a reason to request a longer due diligence period: \"Hey seller-friend, I'm getting a really high rate from Bank X. Can I get an extra 30 days in the contract period to shop for a better loan?\"\n\nLook into getting estoppels for the tenants. Determine what has been their rent payment history. I think it would be highly beneficial for you to request sales numbers for each business (especially the store you're buying to manage. That should be a no-brainer ask).\n\nNext, get an appraisal. This is your golden ticket to a better mortgage or an easy way to start a hard conversation with your friend about the deal.\n\nMy gut tells me that you should take a hard look at your Total future building expenses. How much would be exposed if just one restaurant didn't renew (or went bust). A remodel is great, but what's your capex forecast? What's the age of your roof, parking lot, and HVAC units? Are there any recent code issues with sprinklers or life safety that may have been tripped by the new remodel? How much will the property taxes increase once you pay the purchase price?", "replies": [{"id": "g9lxkxo", "text": "Thank you for the advice! All excellent points. I have done most of my due diligence on the property and tenants. But you are right I may need to reevaluate the rate.", "replies": [], "depth": 2}], "depth": 1}]