Expert: Mike Fortunato - 9/14/2010

Question
Hi Mike, Being in California, you may not be able to address all aspects of my question, so I am going to break it down into a few short questions.  My husband and I bought a 13,500 square foot building in Hancock Maine in 2008.  The building had been on the market for at least three years and it was not a pretty site when we purchased it.  The owners were able to offer owner financing and they appeared to be very happy to be free of the property.  Our purpose is served in about 50% of the building since we bought it.  The other portion was leased to office tenants.
In Sept 2009 we lost 4 tenants due to the recession, including the largest so our income from the rental space is now less than half from the time we purchased the building.  We have not been able to replace any of the tenants.  There is a huge amount of unoccupied commercial office space in the area available and it is being rented for next to nothing.  We bought the building for $410,000 and a recent appraisal came back at $350,000 despite the enormous amount of work we have put into the building to clean it up.  So, here are my questions -
1) We are paying 7% on a 30 year term; what do you think an acceptable commercial interest rate would be in today's market? The owners once suggested they may be willing to reduce the rate.
2) Do you think the lack of tenants and the new appraised value are acceptable reasons to suggest that the former owners should agree to a reduced interest rate?
3) I did read that interest rates on commercial property are quite different across the US and if you are not familiar with Maine, is there a website or somewhere i can call to find what would be an acceptable interest rate today if this building was going to be refinanced?
Thanks so much for your time.  I appreciate the service you are providing.  Rosemary

Answer
For seller financing on a commercial property, 7% is actually not a bad rate. In fact, I doubt you could get that rate at a commercial bank (you can try looking at bankrate.com for interest rates, but also remember that commercial loans are expensive to obtain). So, from that perspective, the loan is likely within market rates. That doesn't mean they wouldn't agree to a reduction, or some other concession, but please keep in mind that all these loan modifications you may be hearing about aren't required -- they are simply offered, in some cases, by lenders who make a determination that it's a better business decision to modify than it is to foreclose. Some borrowers are misled into believing that they are entitled to a loan modification, which simply isn't the case. For instance, what if you created that loan, and then rates skyrocketed a couple of years later? How would you react if the lender came to you and said the rates are too low and they wanted to modify the loan to increase them? :)

So, feel free to negotiate to try and get a better deal, with the understanding that there's no obligation on their part to accommodate your request. Good luck!