Commercial loan modification is simply the process of restructuring the terms of a commercial loan. It is a matter of renegotiating the loan so that it is more favorable to the borrower. For example, one can negotiate a lower interest rate with their lender, extend the term of the loan, defer mortgage payments, or even reduce the principal balance of the loan.
If a commercial property is not generating enough income to pay the mortgage or the operating expenses, a commercial lender may consider a temporary or permanent interest rate reduction. Reducing the interest rate will in turn lower the payment to allow the commercial property owner to increase the cash flow of the building. An interest rate reduction is ideal for property owners who have high vacancy rates. Lowering the interest rate should allow the borrower to service
the debt while the vacant units are filled. On multi-million dollar loans, reducing the interest even just 1% can amount to savings of thousands of dollars per month.
Forms of commercial loan modification
Another common form of commercial mortgage modification is to extend the loan term. Extending the term or the maturity date of a loan can help commercial property owners avoid balloon payments and reduce their monthly mortgage nut. Many commercial loans have short terms, sometimes as few as 1 or 2 years. When the loan matures after only 1 or 2 years, the borrower is responsible for making a large balloon payment to pay off the principal balance entirely. Most lenders will consider a loan extension, but sometimes at a cost.
They may charge a point, or 1% of the loan amount, or extend the term at a higher rate of interest. Commercial property owners with loans nearing the maturity date may want to contact a commercial loan modification attorney to prevent this type of bullying by the lender.
In addition to lowering the interest rate or extending the term, a commercial mortgage lender may consider a deferment of payments as a form of loan modification. Sometimes called a payment moratorium, lenders may allow a borrower not to make a mortgage payment for 3 to 6 months. During this time, the borrower is able to build up cash reserves and rent out vacant units.
Before the economic downturn, property owners could refinance their commercial loans in order to lower interest rates and avoid balloon payments. Now, with the decline in property values, and the reduction in income of commercial properties, even borrowers with good credit are having their loan applications denied.