Commerical Loan Assumptions – The Hard Truth…

Howdy from Cedar Crest, NM….

I was shocked to see snow on the ground this morning….I am not ready for snow. The summer was way too short for me this year. I am usually up for the winter…but I am gnashing my teeth having to deal with the cold.

Anyway….The Grassland Team just closed on a shopping center that we have worked on for a long time. There were times that we felt the deal was going to die. There were a lot of reasons…but I want to share with you a few key learning points regarding commercial loan assumptions.

The assumption process brought back a memory to me regarding the word ASSUME…….

In the 1976 movie The Bad News Bears, the coach (Walter Matthau) points out the folly of assumptions. He writes “ASSUME” on the chalkboard, then adds slashes
“ASS/U/ME” while saying, “When you ASSUME—it could make an ASS out of U and ME!” Ohhhhh….how true this is….

Just in case you are wondering…..Assumable Commercial loans have the following attributes….
1) Prepayment penalties. Assumable loans give the owner a way to sell his/her property by allowing the potential buyer to assume the existing loan and not have to pay penalties for paying the loan off early. It is a selling point for the lender to convince the buyer to get the loan….”No worries…it is assumable.”
2) The party assuming the loan will have to QUALIFY….so….it is never a slam dunk and usually requires more to qualify…which I will explain below.

In early 2007 we (Grassland Investments) were under contract to
purchase a 54,000 sqft shopping center in El Paso, TX. What was really
attractive about the deal was a low down payment and the ability to
assume the existing loan at a low interest rate.

If you notice…especially if you are getting deals from brokers and agents, tag lines for some deals say “Hey…it has an assumable loan at a low rate.” The buyer’s perspective is “I can walk into an existing loan and tada!…..I am the new owner of a great property at a low rate”….right? Well….let me explain a few things to you based on my experience regarding loan assumptions.

1) There is no incentive by the current lender to let anyone assume the loan especially if the loan is in good standing (performing). This is something that I found out the hard way. The hard truth was explained to me by friend and lender, Brandon Haddon of Omni Credit. I told Brandon that the lender was taking it’s sweet time and really being slow to help us get the deal done. Brandon’s response was “If the lender has a performing note…why in the world will the lender be in any rush to help a potential buyer assume a loan?” Brandon was right. The truth of the matter is, the lender is in a great position and really does not care about your closing date or anything for that matter. The lender has already loaned the money. The loan is getting paid. What is the rush?

2) When assuming a loan, make sure you have a clause in the contract stating that the purchase contract is subject to the lender following through on the assumption and that the closing date depends on the lender’s approval of the assumption. This was not a problem with our deal since our seller was very understanding of what we were facing. BUT, I can see where in other deals the assumption process can kill a deal. The last thing you, the buyer, wants to deal with is defaulting on the financing deadline because of the lender. Yes…there is the “financing contingency” BUT….you want to be specific when it comes to dealing with an assumption.

3) Be prepared to jump though hoops. Here is where I would like to quote my friend Tom B. “You are not paranoid if you’re right.” I may be totally wrong here….and a tad bit paranoid…..but I have never had to provide so much information, and fight so many frivolous request before with any loan I have done. There was a point where our attorney, Michel Powlen of the Schinner law group (www.schinner.com) had to get involved to debate ridiculous requirements. It was to the point where we felt the lender was trying to use a heavy hand to convince us to walk away. Paranoid?

4) Prepare you investors. Our biggest concern with the timing of the assumption was our investors. Although our investors hung in there for the wait….holding on to our investor’s money while we were waiting on the lender was nerve racking. When we were finished raising the funds for the shopping center, we were told that we were weeks away from closing. Weeks turned into months. Fortunately, our investor held strong and we did not lose a single investor. Here is where the lesson of the word ASSUME played a big role. There is a story on how we were able to keep our investors in the deal but I will save that for another blog.

I am sure not all commercial loan assumptions are difficult….BUT….next time, I will not be swayed by the words “assumable” as a positive attribute of a property. A loan that is assumable will not keep me from looking at the deal but at least I will be prepared for what is in store.

Until next time……rob

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