Commercial Interest Only Loans?

teddythebear's picture
Rank: Neanderthal | 2,597

Anyone know any lenders that still do long term, preferably 10 years, on interest only loans? We have an existing property, with $6 million in debt. I prefer to do I/O for like 5-10 years then have it convertible to amortizing term. I called several banks and many cringed at interest only unless its on construction.

Comments (33)

May 23, 2013

I haven't heard of anyone doing I/O for that length of time nowadays, though admittedly we haven't been looking at that sort of financing. There's no way a commercial bank does that, so I'd save my time there. You'll have to look elsewhere...

May 23, 2013

Typically need a combination of top market/asset quality/sponsor. What type of asset? Stabilized?

May 23, 2013

At the firm I am interning, we usually pass it if it is IO for longer than 3 years. However, there are some insurance companies are willing to underwrite very long-term IO. You can try to call some insurance companies.

May 23, 2013

Ok thanks for getting back to me. I can imagine after the downturn why banks would opt out of this type of lending. The property is multifamily. Another question, we have about two acres of additional land, which was meant for phase two, if the value of the land is 20%-25% of the project costs, can we use the land as a form of equity/downpayment?

May 23, 2013

would probably depend on the liquidity of the land/overall property

May 23, 2013

Couple of things come into play here...Is the loan to value less than 50%?

Banks would do a business credit line or a revolver, which are normally interest only for CRE given the property has a LTV of 50% or less.

I'm assuming this is an income producing property and in that case the debt coverage ratio has to be well over 2.0x. So, when the revolver is converted to a term loan you want to have a buffer zone in terms of repayment capabilities.

Wally!

May 23, 2013

Is the property stabilized? If so, you can get aggressive agency financing through FNMA that will likely have an I/O term. Shit, I just saw a FNMA construction takeout deal underwritten to 65% stabilized LTV w/ a 7 year I/O term... definitely doable

May 23, 2013
hopefulbanker99:

Is the property stabilized? If so, you can get aggressive agency financing through FNMA that will likely have an I/O term. Shit, I just saw a FNMA construction takeout deal underwritten to 65% stabilized LTV w/ a 7 year I/O term... definitely doable

yea property is stabilized, about 14 years old. not sure what the existing value since we haven't gotten it appraised since 2007 and the value has definitely dropped from that time, but the loan might push the LTV above 70%.

May 24, 2013
TeddyTheBear:
hopefulbanker99:

Is the property stabilized? If so, you can get aggressive agency financing through FNMA that will likely have an I/O term. Shit, I just saw a FNMA construction takeout deal underwritten to 65% stabilized LTV w/ a 7 year I/O term... definitely doable

yea property is stabilized, about 14 years old. not sure what the existing value since we haven't gotten it appraised since 2007 and the value has definitely dropped from that time, but the loan might push the LTV above 70%.

So 2nd question, why the need for 10-yr I/O if it's stabilized? Are you planning on dumping cash into it for capital improvements to raise the rents?

May 24, 2013

in top assets at 65% LTV we are seeing 10 yr I/O at 3.75%

May 24, 2013

yea i figured most lenders would be iffy about it, well we still have about two acres of land, so i am going to see if we can do a land downpayment for a property.

May 24, 2013
TeddyTheBear:

yea i figured most lenders would be iffy about it, well we still have about two acres of land, so i am going to see if we can do a land downpayment for a property.

Gotcha.

Most lenders aren't going to like the idea of taking land as collateral given it's historical price volatility and the fact it's not income producing. I think if you could get a little more comfortable w/ some basic amortization (shouldn't be that significant since the property is stabilized) you'd be in a better spot for getting the debt. Not trying to rain on the parade here, just want to give you a little perspective from the debt side.

May 24, 2013

Pending the quality of asset/market, I'd assume the agencies are your best. By the sounds of it, no lender is going to provide full-term I/O on the subject. A few years? Maybe - depending on a variety of factors. Cash-out and phased asset are two other issues. Is the goal to still develop phase 2? And is 70% inclusive of this additional 2 acres?

May 24, 2013

hopeful, i am not referring to the land as collateral, i mean we will be building on it, but instead of putting in equity, the land will be the equity.

Jun 1, 2013

Late to the party here, but you'd be bat droppings crazy as an organization to go interest-only for 5-10 years when you could get amazing fully amortizing terms through the agencies in a low-interest rate market with rates consistently pushing higher. 10-years from now I wouldn't be surprised to see 10% agency rates.

Jun 3, 2013

DCD, wouldn't there currently be more risk from increasing the amount of equity in a low interest rate/weak economic environment with deflation fears?

Jun 3, 2013
sdb5057:

DCD, wouldn't there currently be more risk from increasing the amount of equity in a low interest rate/weak economic environment with deflation fears?

We're not in a weak economic environment for commercial real estate and for multifamily real estate in particular and I'm not aware of any deflationary fears among anyone, least among the Federal Reserve, which is talking about pulling back QE3.

Jun 6, 2013
DCDepository:
sdb5057:

DCD, wouldn't there currently be more risk from increasing the amount of equity in a low interest rate/weak economic environment with deflation fears?

We're not in a weak economic environment for commercial real estate and for multifamily real estate in particular and I'm not aware of any deflationary fears among anyone, least among the Federal Reserve, which is talking about pulling back QE3.

I have been getting mixed signals from a number of people about this. No way to know for sure until something occurs. The main reason the Fed is talking about getting rid of QE3 is to make the market think that it's recovering, as continuing QE3 has presented "diminishing returns" and may in fact be hampering confidence.

Jun 3, 2013

People do Ten year IO on CRE, just pull a couple annex A's from recent conduit CMBS deals, they'll all have at least a couple IO loans.

Usually they're on relatively good real estate though. $6mm is pretty small and you're asking for a lot - like you're not just asking for long term IO, you're asking for long term IO that you don't have to take out when the term is up, you want it to start just amortizing down after ten years... It's a lot to ask for a shitty little $6mm mortgage.

Sometimes mortgages have a couple years of Io before they start to am, but it's pretty uncommon for a CRE mortgage to have a ten year IO period followed by am with no ARD type trigger atthe ten tear mark... Like, how long of a mortgage are you thinking? Such a loan couldn't fit neatly in a CMBS structure for reasons I could elaborate on if anyone cares, a local guy would have to do it, and they just wouldn't. It's a shitty loan.

Jun 4, 2013

Just did a full term IO deal last week. I'm at a GSE.

May 5, 2016

Try Commercial Loan Direct. They have very flexible loan options as they work with around 250 lenders.

May 5, 2016
Richard-Rader:

Try Commercial Loan Direct. They have very flexible loan options as they work with around 250 lenders.

For the benefit of any board members that are new to the real estate industry, any time you encounter a business with the word "Direct" in its name, direct means the opposite of its usual connotation.

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May 5, 2016

Recently closed a CMBS loan with 5 years I/O. Longest I/O schedule we've gotten in a long time.

May 6, 2016
CREF1524:

Recently closed a CMBS loan with 5 years I/O. Longest I/O schedule we've gotten in a long time.

What were the other terms of the deal, if you don't mind sharing? LTV, spread, asset type... As VTech's post makes clear, the IO period is meaningless out of context.

May 9, 2016

Low leverage (45% LTV), retail power center with two strong credit anchor tenants. Store sales at each of these were over $1,000 PSF. All in rate was 4.65%. We got a 10/30 structure on that deal. The reason we went CMBS were because of loan proceeds, considering the Borrower wanted to cash out and reinvest this capital into another project. The I/O was just gravy as it opened up the CF for a few years.

I should add that this was a structured deal, with many different escrows and reserves built in, to off set Co-tenancy risk with the two anchor tenants.

May 5, 2016

If you're under 40% LTV there are lenders that will do (de facto) indefinite I/O periods since the assumption is that you are naturally lowering the LTV as the property appreciates.

Best Response
May 6, 2016

It depends on the leverage on the asset. If the asset is close (or higher) to 70% LTV, I would say it is nearly impossible to get full term IO at this point. As a CMBS lender, credit committees across the entire industry are getting very skiddish about IO. I recently (this year) closed a deal that was 60% LTPP with ten years IO. It was a small acquisition loan, and it was brand new construction.

As for less IO, I think you could get maybe five years at the most if the LTV came in at 70%. I would say the rule of thumb right now is you may be able to get a year of IO for each full percentage point below 75%. However, I could caveat that with ten things too, but overall, if its a good asset with long term tenancy, that is generally the rule of them. Now if you have a VERY VERY good story about your ability to refinance in ten years, then you might have a chance, but otherwise, I would say ten years IO at 70-75% leverage is a no go.

Right now, in the CMBS world, everyone is freaking out about refinance risk. 2016 and 2017 will be all about refinance risk as all the CMBS loans originated in 2006 and 2007 were underwritten blind (by the Lenders). I mean senior loans of 80% LTV with full term IO? That is insane!

Private message me if you want to discuss this further.

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Jul 13, 2017
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