COMMERCIAL REAL ESTATE FINANCING AND AMORTIZATION
Dec. 9, 2020
Commercial real estate can be quite expensive. The price can be worth it if you’ve got a strong business plan and have done your homework to ensure that you know what you’re getting into. But after you conduct your due diligence and decide to move forward with a piece of commercial real estate, then you’ll need to finalize your plan for financing the transaction
Most people and businesses can’t afford to purchase commercial real estate outright. As a result, they have to turn to lenders for a loan. Not all loans are created equal, though, which is why it’s imperative that you understand the terms of your financing agreement and how to know when you need to seek terms that are better for your situation.
One aspect of a commercial real estate loan that can have a tremendous impact on your future is amortization. Generally speaking, amortization is the process of paying back a loan in installments over a period of time. While residential mortgages typically have a 15 or 30-year amortization period, commercial real estate is often limited to 25 years or less.
The key here, though, is that while the monthly payments on the loan are calculated using the amortization period, the payback period may be much shorter. For example, a commercial real estate loan may have a 20-year amortization meaning that your monthly payments are the cost of the loan and interest divided by 20 years, but your payback period may only be 10 years. So, you’d pay the monthly rate based on the 20-year amortization period, but after the 10-year payback period you’d have to pay the rest of the outstanding loan in one lump sum, sometimes called a balloon payment.
What This Means for You
This is really some of the nuts and bolts of commercial real estate financing, but you need to have an understanding of it so that you can have a realistic perspective on your financial future so that you can make the decisions that are best for you. If you find that prospect daunting, don’t worry. Skilled legal professionals like Larry Silvestri are well-versed in all aspects of commercial real estate and can help competently guide you through every aspect of the process.