This is going to surprise you, but commercial banks, credit unions, and federal savings banks (the old S&L's with a Federal charter) all quote pretty much the exact same interest rates and terms on commercial real estate loans.
This is true for huge commercial banks in Los Angeles and for little credit unions in Maine. No matter where the property is located, as a commercial loan broker, you will always know what to quote.
To be clear, we are talking about commercial real estate loans on standard commercial rental properties, like office buildings, shopping centers, retail buildings, and industrial buildings.
The rates and terms will be a little more scattered for multifamily properties. Some banks, especially savings banks, love-love-love apartment buildings. They will quote delicious interest rates and terms.
Smaller commercial banks are less enamored with apartment buildings because their owners seldom keep huge deposits in their company checking accounts. If they have cash, they immediately go out and buy another building. In contrast, widget manufacturers might keep large balances in their bank for the the new bank to win. Banks, especially smaller ones, are all about deposit relationships.
Before we get into the interest rates being quoted by banks on commercial loans today, let's first talk about terms:
Amortization:
Most banks will quote a 25-year amortization. A twenty-year amortization is to commercial loans what a 30-year amortization is to home loans. It's the norm.
If the property is older than, say, than 35-years, the bank might insist on just a 20-year amortization because the property is getting pretty long in the tooth. The building is not going to last forever. The bank needs to eventually get their principal back before the termites stop holding hands.
Term:
Most commercial banks today will give you a ten-year term on your commercial loan.
Fixed on Adjustable:
The typical bank commercial loan is fixed for the first five years. There is one rate readjustment at the beginning of year six, and then the rate is fixed for the remaining five years.
When the rate readjusts, what is adjustment tied to? In other words, what is the index and what is the margin?
This is going to surprise you, but most banks don't say! What???? The promissory note will simply say, "The rate will readjust to whatever the bank is quoting at the time for similar commercial loans."
What if the bank tries to raise the interest rate to 20%? This could actually happen, if the dollar were to suddenly collapse.
In such a case, the bank would give you a window in order to pay off their loan, without penalty, with a new loan from a cheaper lender. A window is a period when there is no prepayment penalty. Most commercial real estate loans from banks give the borrowers a 90-day window after a rate readjustment.
Prepayment Penalty:
Banks differ on prepayment penalties. The penalty could vary from 1% to 2% during the entire 5-year term, to a declining prepayment penalty of 3% in year one, 2% in year two, 1% in year three, and perhaps 1% in years four and five.
So what do you quote on a $300,000 permanent loan on a little retail building in Bum Flowers, Alabama? I want you to quote 3%-2%-1% and none thereafter. No bank is going to refuse to make a good commercial loan if it can get a declining prepayment penalty of 3%-2%-1%.
Will a bank ever make a commercial real estate loan with absolutely no prepayment penalty? The deal would have to be very, very good to get them to waive it completely.
Interest Rate:
Banks all quote pretty much the exact same interest rate - between 2.75% to 3.5% over five-year Treasuries, depending on the quality of deal (more on this below).
Five-year Treasuries as of January 22, 2021 were 0.44%. Therefore the bank is going to quote you between 3.19% to 3.94% today.
You can always find the latest commercial real estate interest rates and Index values by going to our wonderful Resource Center. Be sure to bookmark this wonderful reference source.
Quality of the Deal:
Here are the factors that affects bank interest rates on commercial loans -
- How much cash does the borrower keep in the bank? The more liquid your borrower, the lower his interest rate.
- How old is the property? The younger the building, the lower the rate.
- How gorgeous is the building? The prettier the building, the lower your rate.
- How desirable is the location? If your building is located on the bets street in town, you may get the bank's very lowest commercial loan interest rate.
- Assuming you are at a bank of suitable size, the larger the loan, the lower the rate. Big banks make big commercial loans. Small banks make small commercial loans. Match the size of your bank to the size of your deal.
- How close is the building to the bank? The further your building is from the bank, the higher the interest rate you will probably get.
Moral of the Story:
Always apply to a local bank.
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