How Can I Negotiate a New Loan with Commercial Lenders?

David Cohn
Aug 27, 2021
Commercial Real Estate Lending

There are various commercial lenders you can turn to if you need funding for commercial property acquisition. Your options will range from traditional banks to hard money lenders.

And if you are thinking of negotiating your new loan with any of these institutions, it's essential to understand their motivations.

By putting yourself in their shoes and knowing what they want out of a deal, you may be able to more effectively negotiate interest rates, closing costs, prepayment penalties, miscellaneous fees, and other such factors.

Understanding the different types of commercial lenders

Commercial mortgage lenders can roughly be classified into eight groups. Let's talk about each one, how they work, and what they're looking for in a deal.

1. Agencies

The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association—better known as Freddie Mac and Fannie Mae—were created by Congress to provide stability, affordability, and liquidity to the US mortgage market.

These agencies are primarily interested in stabilized multifamily properties that have a stable cash flow. These institutions issue low rate, long-term, non-recourse, and high leverage loans with a possibility of interest-only periods.

Such products are popular with investors who want to hold on to their multifamily property for a long time and could benefit from low rates and high leverage.

Do note that Freddie Mac and Fannie Mae loans usually have prepayment penalties (either step down or yield maintenance). Be sure that you understand this if you have plans to pay your loan off early.

2. Commercial Mortgage-Backed Security

Also known as CMBS lenders, these types of financing institutions are very similar to agencies. However, they prefer stabilized and cash-flowing commercial real estate, including retail, hotels, offices, and multifamily buildings.

If you're looking for a value-add or construction loan, this type of lender is not for you.

Loans from CMBS lenders share the qualities of mortgage loans from agencies—they are high leverage, non-recourse, low rate, and long-term.

However, note that these types of lenders usually impose costly prepayment penalties (referred to in the industry as 'defeasance'), so it would be expensive to refinance or sell within just five to 10 years.

CMBS loans are best suited for borrowers that want the best rates and the most leverage and are financing properties with predictable cash flows.

3. The Small Business Administration

The SBA issues loans to small business owners and entrepreneurs who want to own the premises in which they work. Such commercial properties are called 'owner-occupied' buildings, and SBA loans are often called 'owner-user deals.

The government has mandated the SBA to help smaller companies thrive by offering up to 90% LTV, low-interest rates (usually ranging from 2.5% to 5%), and long terms (as long as 30 years).

4. Banks

If you are negotiating your commercial real estate loan with a bank, it's essential to understand that these institutions are primarily motivated by client relationships.

They usually prioritize clients with sizeable deposits and clients to use many of their other product lines. While setting up an additional depository account is not required, it can certainly help get your deal approved.

Most banks prefer stabilized properties, but they also issue loans for value-add deals and ground-up construction.

Banks' commercial mortgage loans are typically full recourse, amortized over anywhere from 20 or 25 years, with 3- to 10-year terms and step-down prepayment penalties. If they see you as a valued client, they may be more willing to step outside the normal credit parameters and give you what you need.

5. Life companies

The money used by life companies comes primarily from member life insurance policies. This is why these financial institutions are cautious in choosing deals. Their primary motivation is to preserve capital.

Because life companies are conservative, they tend to fund only lower-risk assets. They prefer doing deals in the Top 20 MSAs. They may be a good fit if your leverage needs are low to moderate and if the property you want to finance is cash-flowing and stabilized.

The great thing about life companies is that they are often willing to negotiate interest rates. This is because their focus is capital preservation instead of risky strategies for more yield.

6. Credit unions

Like banks, credit unions prefer stabilized properties and tend to prioritize client relationships. What's great about them is that they lend money for value-add projects and ground-up construction projects.

Commercial mortgage loans from credit unions are full recourse and are usually amortized over 20 to 25 years. They are better than banks in a way, as federal credit unions typically don't have prepayment penalties for refinancing or selling commercial property.

7. Debt funds

Real estate debt funds gather money from different investors and tend to be more flexible about what projects they finance and who they lend to.

As a result, loans from these financial institutions are best suited for transitional properties and borrowers who need bridge capital. Terms range from six months to three years, and interest rates are pretty high (usually in the higher single digits).

8. Private capital

By far the most flexible, private capital lenders lend money on any commercial property deal that makes sense—that is, if the agreement has a solid business plan and if it's clear to them how the borrower will pay off the loan when it comes due. Their terms are similar to debt funds, and interest rates range between 7% to 15%.

What can you negotiate?

Now that you understand the motivations of each type of lender, it's essential to understand exactly what about you can negotiate your commercial mortgage loan:

1. Transaction time

If you have a good relationship with a lender, you can ask them to speed up the application and approval process so you can get access to the funds right away.

2. Interest rates

Getting the lender to lower the interest rates will help you free up your cash flow, which is especially important during the initial stages of the loan.

3. Prepayment penalties

Don't hesitate to talk to the loan officer to clarify their prepayment penalties.

Aside from the lender, you can also negotiate with the seller, particularly miscellaneous fees and closing costs.

For example, ask if they can cover appraisal and inspection fees so you can save money. You may even be able to get the seller to cover some (if not all) of the closing costs, including attorney fees, recording, taxes, and title fees.