Building Mortgage ARM?

[Crusher]

So this 2nd location is turning into more than I thought it would and am now buying the building. When I started the process to buy the building, I assumed it would be just like a home mortgage. I am not financing any of the equipment or build-out, I am just buying the building. I have 20% to put down also. So when I got all the loan info from my bank today, they are doing it as business loan not a mortgage. 3 year term, 4.77% ARM, ammortized over 10 years. I don’t like the idea of the ARM. Is this common to do for a commercial building?

 

[famousperry]

we did ours similar to a home mortgage except the interest rates for commercial loans at that time were slightly higher…see if the property owner would hold a note like ours did

 

[Scott_Hack1]

Unfortunately, yes. I’d push and try to get a 5 year lock.

 

[Piedad]

A couple of thoughts for you: First, you are in a great position in having 20% for a capital contribution … plus, you have obviously cranked the numbers and feel that you can comfortably fully amortize the remaining 80%, over 10 years. This presents an opportunity for both you and the seller, if he would agree to a seller takeback mortgage structured at something like a fixed rate of 4.75% and fully amortized over 10 years. If you borrow the 80% from your bank, the seller will receive 100% of the selling price at settlement, likely without an investment alternative that can earn 4.75% for him (check the current Certificate of Deposit rates being offered by financial institutions) … so providing financing for you would provide him with the 20% equity position to make the deal less risky (he would also, of course, hold a mortgage on the building), while simultaneously earning him a higher rate on the remaining balance than he could earn with a bank or other financial institution. The “win-win” for you would be the fixed rate mortgage.

There’s no harm in asking if this concept might be attractive for him. An attorney can draw up the needed mortgage documents, and record them for the holder.

 

[bodegahwy]

Have you shopped banks? You should be able to find a little better program than that, but the short answer is “yes” adjustable rate notes are very common.
As mentioned above, you can probably find a lender that will lock for at least 3 years if not for 5. Taking the loan in parts here are some comments on what I see out there:

1. Term: Other than SBA or similar state programs, 5 year notes are most common. Sometimes I see 7 year. 3 is short. You can write into the deal that the lender agrees to renew the note as long as it is “performing” which means you are making all payments on time etc under the same terms for a small fee ($100).
2. Amortization: You can probably find a lender that will do a 20 year amortization.
3. Interest rate: The interest rate you mention is competitive but not great. Especially for a rate that can change every year. I recently re-did my note at 4.25% locked for five years with a 20 year amortization. You may or may not be able to get a lock but if you do not, I suggest asking for two things: 1. a maximum annual adjustment… for example rate may not increase or decrease by more than 1% each year and 2. a Cap on the highest rate. Realistically that is going to be up around 8-9% but at least if go back to Jimmy Carter era rates you are protected.
4. Down payment: 20% is very common. Bank regs allow for less than that but you would need a strong bank relationship to get lower.
5. Loan initiation fee: Shoot for .5%

If you decide to shop banks expect to move your total banking relationship. I would suggest you have a look out there and see what other banks might offer you. You are “buying” money and YOU are the customer. A business owner who can put 20% down on a fair price for the property they occupy is very desirable local banking customer. Go out and shop!