Monday, September 3, 2007

What you need to know besides rate

I had a strange conversation with a commercial real estate broker the other day. Essentially he wanted to know information from me, but wasn't giving the information I needed to give him what he wanted.

One of the worst questions you can ask a broker is "What's your rate?" That very question contains a message you're probably not intending to send: in essence, you're saying to the broker that you're going to judge a loan based on one aspect that can be highly misleading.

Here are some other questions you can ask that will get you much better information, and put you in the driver's seat.

1) Is there a lock-out? A lock-out is essentially a prepayment penalty on steroids -- it keeps you from refinancing the loan for the duration of the lock-out. So, for instance, if someone puts you in a loan that adjusts every year and has a three year lock-out, you could be in bad shape.

2) Is there a pre-payment penalty and how long is it? I've seen loans with no pre-pay penalties (and they have higher rates.) I've also seen loans with fifteen year pre-payment penalties.

3) Is the loan full recourse or partial recourse? A full recourse loan sure has a lower rate, but it has a lot of consequences.

4) How is the lender treating the property? Most lenders have four tiers, and generally speaking, you'll find the same properties in these tiers. But there are exceptions -- some lenders, for example, have car repair facilities in the same tier as gas stations. Others won't touch gas stations. Some lenders care that a property is vacant, others don't.

5) What's the loan-to-value ratio? A 97% LTV ratio is a more expensive loan than an 80% LTV, but it's worth it to some people to not have to sink a bunch of cash into the property.

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