Steve Rhodes

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First of all, as the name implies, this loan, just like the traditional residential 30 year fixed is fully amortizing over 30 years and the rate is fixed for the entire term. Further the program is designed for owner users (businesses that own the facility they operate out of) and is a suited for a broad range of building types, not just the typical office, industrial, retail. Properties like automotive, restaurants, daycares etc are acceptable.

Besides the obvious benefit of not having to worry about an adjusting rate or pending balloon, the cash flow savings can be a significant for a small business that is trying to reduce monthly costs. On average we see a 20% cash flow savings when compared to a 20 year amortization loan.

To be fair, the reduction in payment is due more to spreading out the loan, than a true savings, but many business owners are more concerned, especially in our struggling economy, on keep their monthly outlay down and cash flow up. Other benefits include ability to pay the mortgage down by 20% per year without incurring the prepayment penalty and that rates/fees are right in line with traditional loans.

How and why haven’t you heard of the Commercial 30 Year Fixed before?

Couple of reasons. The evolving commercial secondary market is one of the sources behind this loan program (and others). Historically, banks originated and funded loans basically with their own money, primarily from deposits. They were (and still are) at direct risk of losing that capital should the borrower default.

The secondary market is different than the traditional system. Loans are instead “pooled” together and sold to investors in the form of bonds, creating greater diversification and less risk for the entities holding onto the loans. This diversification is one of the fundamentally differences, that enable major lenders to create and underwrite loans outside of the norm.

What are the negatives?

Few. Prepayment penalties are higher than traditional loans. Most banks will ask for a 5,4,3,2,1% while this loan may have a straight 5% for five year or as high as 10% for five years depending on the particulars. Interest rates are typically .1 – .4% higher than on traditional programs but the increase in amortization, as stated above, normally increase cash flow by 20%.

A very common mistake we see is that entrepreneurs assume they will get the best deal from their existing bank. It’s a logical assumption. After all, the business has their checking/savings account, perhaps they have other services such as their 401 k etc tied in with their bank. And they have personal relationships with the people and assume this will help them get a break/edge. The reality is that traditional banks have the most conservative underwriting standards and offer some of the shortest fixed periods and amortization schedules in the market.

To often the business owner simply does not shop and get lured into a short term loan that either adjusts, from once a quarter to once every 5 years or full on balloons. This puts the business owner in a very vulnerable position as rates/terms could be much worse when the loan adjusts or balloons.

Another issue of having your commercial mortgage held by your bank that has your deposits is a nasty little provision called the “right to offset”. This means that the bank has the right to enter your checking/savings account (business or personal) and remove cash to “offset” the balance that’s owed on the mortgage. Banks only exercise this right in times of distress/default but it is dangerous for the borrower and often comes when the business owner has the biggest need for cash – in bad times.

There are many more options out there than most entrepreneurs realize. For example, there’s a little known 30 year fixed commercial loan that has rates and fees right in line with bank financing, but the loan is fixed for 30 years. The borrower can enjoy piece of mind knowing they never have to worry about refinancing or having their rate adjust in the future.

In addition, because of the long amortization period the cash flow savings can be substantial – often 15% – 25% less than a typically 5 year fixed 20 year amortization bank loan.

Business owners may consider working with an experienced broker that is in touch with innovative commercial mortgage programs that are not offered by banks. A broker normally works with several different lenders, each of which has multiple programs. So, by working with a broker the borrower is exposed to many different options, and only has to deal with one source. Essentially the broker’s market knowledge can quickly and efficiently point out all relevant options that fit the business owner’s situation.

A common misperception is that brokers will add a substantial cost onto the loan, which is simply not the case. A good broker will create a competitive situation between banks/lenders and should save the borrower money, not just tack on an additional origination fee. Likewise, most brokers now get paid directly from the lender on deals from $200,000 – $5,000,000, so the entrepreneur doesn’t have to worry about that.

Regardless, if the borrower wants to shop on their own or work with a broker it is in the best interests of the entrepreneur to get out there and explore options. Don’t simply assume that your existing bank has your best interest at heart, because they don’t.