Pop the Bubble of a Commercial Loan Balloon

Millions of commercial mortgages are either still underwater or have large balloon payments due. Commercial mortgages originated prior to 2008 were structured with a balloon payment which was a popular option during that time.

For those not familiar with the term, a balloon payment is a large payment due at the end of a mortgage or loan. Since the payments are not spread out over the full term of a normal 30 year mortgage, the balloon may come up after the 5th or 10th year of the loan. So for example, a commercial property for $1,000,000 may have monthly mortgage payments amortized over 30 years to make the payments affordable to the owner yet the full loan balance is due after 10 years. This will mean that the owner has to pay the lender approximately $800,000 depending on the interest rate.

Prior to 2008, this was no problem since property values were always increasing. The owner can either refinance or sell the property for a profit. Now with property values either depressed or stagnant, both of those options are gone for commercial owners. When the balloon payment is due on call, the owner can be faced with foreclosure even if they have been making on time payments up to that point.

For distressed commercial owners of properties ranging from apartment buildings to strip malls, the best solution is to negotiate a loan workout. A loan workout will modify the terms to a permanent fixed payment over 30 years with no more balloon payments. In some cases, a short payoff can be negotiated to lower the principal due so the owner can sell the property.

Commercial lenders and servicers are very open to doing commercial workouts. They realize that it is difficult for the owner to refinance with very few options available if they are upside down in value. Also, why lose a on time paying customer when you can keep him for a few more years. And finally, banks do not want to take over and manage any buildings or malls. They want to collect mortgage payments, not rents.

It is wise to consult a professional loan workout negotiator who can package your modification, present the best offer to your lender, and get you the best terms for your property. For more information or a free consultation, contact us at info@myforeclosureconsultant.com