about a RE loan commitment letter… |
| Posted by: tere Mar 30 2004, 07:20 PM |
| my husband and I would like to purchase a brand new 3 story town home with retail space on the first floor. This duplex unit is yet to be constructed, and is phase 2 of 20. Phase 1 included 12 others that have already been built and are up and running. The bank that we have our small business checking with wants to give us the loan for the property, it will be in our name, not in our s-corporation’s name, but has some incredible stipulations in the commitment letter for the loan. We do not want to accept and sign this letter until we get most of these stipulations changed. What are resonable stipulations for a commercial real estate loan with a bank? – prime rate + 1.5% – ‘prepayment of loan’ fees – all business finances are to be done thru the bank – appraisal of property (this is a brand new, yet to be built property in an award-winning 2yr old development) to total the total amount of the loan – enviornmental assesment (no one else has done this, and we are a martial arts business) – insurance for the property is to have the bank as the payee in case of loss as long as they hold the title these are some of the major points of the letter. HELP We plan on negotiating with the loan officer to get some of these removed and changed, but what do you recommend. We will consult a lawyer as well. I am also currently appling for a loan with another local bank. Hopefully the competition will start some better negotiations with the current bank. Or will this back fire on us? thank you! |
| Posted by: loanuniverse Mar 30 2004, 09:25 PM |
| tere: Let me see if I can go over your concerns. – prime rate + 1.5% Pretty standard and actually competitive in today’s market {if the maturity is about 5 years}. Prime is 4%, which means that the loan has a 5.5% rate. You forgot to mention what kind of maturity and amortization. That is important too. – ‘prepayment of loan’ fees This is also usual. A commitment letter will give you some time to go over it and will request the non-refundable commitment fee to be included with the letter. By the way, you did not mention what fee is going to be charged… You also did not mention what the amount of the loan was. The standard would be 1%. Negotiation can bring this down. – all business finances are to be done thru the bank Also standard. The lender will require that “primary banking relationship” be kept with it. I have never seen it written as requiring “all banking to be done with the bank”. But think about it: is this enforceable? You are banking with them already….. If you want to give in on something, this is the one thing that is not really important. – appraisal of property (this is a brand new, yet to be built property in an award-winning 2yr old development) to total the total amount of the loan Real Estate loans need appraisals, this is something that is going to be hard to get away from. The only thing that comes to mind is getting by without one if the loan is not enough. Some lenders make provisions for loans under a certain amount {$250,000 is a common amount}. Depending on the amount of the loan, the downpayment, and the type of property, you can probably negotiate this. – enviornmental assesment (no one else has done this, and we are a martial arts business) An environmental assessment is standard for commercial properties. It is not so much because of your business, but whatever happened to the property before. There is a possibility that this also can be negotiated if the duplex has a residential component. As in the top two floors are residential. If the duplex is purely commercial it might get difficult to get them to waive it. The argument has to rely on presenting the property as residential. The secondary argument would be that nobody else buying has been required to do it. – insurance for the property is to have the bank as the payee in case of loss as long as they hold the title Standard. No way to argue this. The whole deal does not look too onerous. The rate, prepayment fees, appraisal and environmental are pretty standard on most loans. The difference between getting a good deal and a not so good one is based on being able to negotiate rate, fees, amortization and maturity. You could probably argue the appraisal and environmental, but chances of success are lower on those two items. Trying your luck with another lender to find out what the competition is offering is always good practice. Of course, the current lender will tell you that the offer expires with the date shown in the commitment letter. However, chances are that the deal will still be there when you come back. By the way, this commitment letter is a great tool to shop around, you can actually use it see if another lender can give you what you want, but the loan will still have to be underwritten so at best the other bank will give you a commitment in a couple of weeks. The answer could also take a month or more This could affect your ability to perform under the purchase contract. Hope this helps |
