Commercial real estate (CRE) loans are complicated. When a CRE loan is close to expiration (if your balloon payment coming due), the options can seem overwhelming.
If you have a balloon payment looming, you can find a basic outline of your options here. There may be options with your existing lender, or you may be able to refinance into a conventional loan, a private money loan, or an SBA loan. Whichever option you choose with a balloon loan, you’ll need to decide soon, or you may risk losing your property.
Talk with your Existing Lender First
Your current lender may provide additional options to you when your loan’s expiration is upcoming.
The first option is a short-term loan extension. This is most common with construction loans if a project is running behind. Some loans may have the option to renew with your current lender using streamlined underwriting.
Another option is refinancing into a long-term loan. This type of loan will require more in-depth underwriting, meaning it may take 3-6 months to close.
You may also wish to consider options outside of your current lender. The three main options which exist are financing through a conventional loan, a private money loan, or an SBA loan.
Conventional Commercial Real Estate Loans
This type of loan is the most similar to a residential mortgage. The largest difference is that the loan repayment schedule is typically 5 or 10 years, compared to a 15- or 30- year residential mortgage. Traditionally, this is the most common loan for existing, occupied properties with a positive cash flow.
Conventional loans may also be structured as balloon loans. A balloon loan may be amortized over a longer period (15, 20, or 30 years), with a shorter repayment schedule (3-7 years), or they could require interest-only payments.
Balloon loans might be a good fit for a borrower who will not be able to afford large payments now but expects to have greater resources when the final payment comes due. They may also be a good fit for investors who are planning to sell the property for a profit prior to the expiration of the loan.
Hard Money Loans
There are two types of hard money, or private investor, loans that may provide a solution to your upcoming note. The underwriting for hard money loans is much more streamlined than conventional type loans, meaning that these loans can be closed in days or weeks — instead of months.
While hard money loans fund faster than conventional types, their interest rates and up-front fees are typically higher.
One type of hard money loan is a bridge loan. A bridge loan is going to provide you with short-term financing until you can secure permanent financing or pay off existing loans. Most bridge loans will have a term of one year.
If your property is being built or needs a lot of repairs a construction loan could be an option. A construction loan is a short-term loan that will provide funding for your project. Whether or not a borrower qualifies for this type of loan depends on the type of construction project, how developed the land already is, and whether the borrower is seeking temporary or long-term funding.
While other loans will provide a lump sum of money, a construction loan will be released to the borrower in increments. As specified stages in the project are reached, additional funds are released.
Small Business Administration (SBA) Loans
SBA loans are underwritten, approved, and originated by lenders but backed by the Small Business Administration. In order to qualify for an SBA loan, the business must be for-profit and operate within the United States. The most popular SBA loan program is SBA 7(a), which can provide funding for working capital needs. The maximum amount for an SBA 7(a) loan is five million dollars, with a loan term as long as 25 years.
While there are many options to consider when your CRE loan is expiring, your individual scenario will determine which loan is best for you.
Regardless of which option you choose, there are several tips that will help this process run more smoothly.
First, make sure to start the process 2-3 months before your note comes due.
Prepare documentation that may be needed: financial statements, tax returns, or business checking account statements.
Initiate a dialogue with your current lender, but do not be afraid to look at other options as well.
We’re here to help you determine which option will best fit your specific case. Commercial lending may be complex, but your options do not have to be. Book a call here and we’ll help you decide what’s right for you.
