then converts to an adjustable rate at a specified spread over a specified index. In most loan structures, the prepayment penalty will either be elimi- nated or drastically reduced once you are out of the fixed- rate period. 3 Allow a potential buyer to assume the existing note. These loans typically allow for a qualified buyer to assume the existing debt rather than pay it off. In a rising interest rate environment, this may present a more attractive debt struc- ture than what is available in the market.
In this scenario, the investor will often structure a fixed-rate period longer than the intended hold period to allow for a longer “runway“or loan term for buyers to assume. This longer runway allows the originating lender to potentially extend secondary financing, known as supplemental debt, as high as 75% cumulative loan to value to a prospective buyer. Supplemental debt is typically only available with Fannie Mae and Freddie Mac loans and makes for a much more attractive assumption. So, you can see how it would be beneficial for a seller to avoid the costs associated with prepayment penalties. But, if you have defined
an exit timeline, you can structure a prepayment penalty window and prepare for it. If you are looking for some flexibil - ity with disposition or refinance tim - ing, you may consider a less expen- sive prepayment penalty for a slight increase in the rate, or possibly a shorter fixed rate. Finally, a buyer’s ability to assume your loan can be a win/win scenario in the right market. The loan is not being paid off, so you don’t get hit with a prepayment penalty. And, as rates increase, your long term, lower-than-market rate will become more attractive to potential buyers, making the potential assumption more realistic. It’s important to have a clear understanding of your prepayment penalty options. Make sure to speak with your loan officer or broker about the options available and choose the one that aligns best with your invest- ment strategy. •
Eager to learn more about real estate investing? Please visit www.thinkrealty.com/courses for additional subject matter information from our Resident Experts.
Eric Stewart is the owner of Atlantic Investment Capita, Inc., a full-service commercial lending advisory and brokerage firm. Stewart has been
structuring finance solutions for commercial real estate investors and business owners since 1996, with products ranging from equipment leases to commercial real estate loans as well as assumption representation and consulting. Atlantic specializes in structuring finance solutions for investment opportunities in commercial real estate nationwide. Atlantic leverages direct relationships with both agency and conduit lenders for permanent loans as well as hedge funds and insurance companies for interim financing. The company also provides equity funding solutions for select properties within the domestic United States. Stewart also provides an advisory platform for commercial real estate investors. It is based on more than two decades of working with clients who are navigating the challenges of financing commercial real estate acquisitions.
24 | think realty magazine :: march – april 2022
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