Refinancing a Commercial Loan No Easy Task
Q: The mortgage on a piece of commercial property I own comes due next year. I had always thought the property would be long sold by this point, but with the real estate market so depressed it looks as though a sale will be impossible. Unfortunately, I don’t have the cash to pay off the loan. What about refinancing it? With interest rates so low, perhaps this is my best choice. The note is held by the seller, not a bank. --P.M.L.
A: Unfortunately, you don’t have a lot of choices. Although interest rates are at historical lows, refinancing a commercial loan is considerably more difficult than refinancing a residential mortgage, especially here in California, where real estate values are still dropping.
Under pressure from federal regulators to prune bad loans and bolster their reserves, banks are shying away from making any new marginal loans that could cause them trouble in the future. And mortgage rates, even for the best commercial properties, aren’t as attractive as those for single-family, owner-occupied homes.
According to Stan Goodfriend, a Beverly Hills mortgage broker who specializes in commercial loans, lenders are typically charging up to 9.5% for a 10-year, fixed-rate loan on a newer, well located and well built piece of commercial real estate with high-quality tenants.
You can expect to be charged up to two points for the loan plus thousands of dollars more in fees and incidental charges, all of which must be written off over the life of the loan. Landlords whose property is not of this “prime” quality can expect to get only an adjustable-rate mortgage that starts at 10% and will be recalculated as often as every three months. Further, they can expect to pay up to three points, plus thousands of dollars more in fees and charges, for the loan.
In both cases, lenders are limiting the size of the loans to 70% or less of the property’s current market value.
Perhaps the most important question you should ask yourself is how long you want to hold on to this property. If you are really anxious to sell it, refinancing doesn’t make a lot of sense. Why pay thousands of dollars for a new loan for a property that you may unload within months?
Perhaps selling it now and licking your wounds will make more financial sense. Only you and your accountant or tax adviser can see what works best for you.
However, if you don’t want to sell at fire-sale prices, perhaps you can persuade the holder of the note to extend the terms of the loan--for a fee, of course. You might offer to make a partial repayment of the balloon amount if you have enough cash to show your good faith.
The key here will be to give something to the note holder to make it worth his while to extend the loan. Remember, he is under no obligation to solve your problem, so you must do whatever you can to make the deal attractive to him. If your note holder is unwilling to renegotiate the loan, your only other options are a new bank loan or selling at the current prices.
Home Improvements Clearly Defined
Q: I plan to sell my house later this year for about $500,000. I qualify for the $125,000 exemption of profits available to older taxpayers. I want to buy a house for about $300,000, but I know that any home in this price range will need considerable work. Can I add the “fix-up” costs of the new house to my purchase price to reduce my taxable gains from the sale of the old house? If I can’t, then I might as well buy a more expensive home in better condition. --D.G.E.
A: The cost of any capital improvements to a newly purchased home are considered part of the home’s purchase price if the expenses are incurred within two years of the sale of the taxpayer’s original home. This is true whether you are old enough to qualify for the $125,000 exemption or not.
Now there are some key points here that you must not overlook. The first is “capital improvements.” The Internal Revenue Service is quite clear on what these entail. They must be improvements of a substantial nature. Remodeling a bathroom or kitchen qualifies; repainting the living room does not. Installing a swimming pool or adding a bedroom are permanent improvements; cleaning up landscaping is not.
Further, the cost of these improvements must be incurred within two years of the sale of the original home--not within two years of the purchase of the replacement home, as so many taxpayers erroneously believe.
In your case, you would have to buy a home for $375,000, or spend $375,000 on the home and the permanent improvements, to avoid paying any taxes on the sale of your $500,000 home.
Complexity Dictates Appraisal Method
Q: My husband died last year and I must have the properties we jointly owned appraised for estate value purposes. What process must I follow? Do I have to hire professional appraisers? This could cost a fortune. --J.N.
A: The process you should follow depends on the complexity of your holdings and your willingness to play it absolutely straight with the IRS.
In most cases, our experts say, taxpayers can get away with valuing their real estate holdings through a written list of recently sold comparable properties in the neighborhood. You may have a friendly real estate broker who will perform this service for you gratis; if not, you can purchase such a list from a qualified broker.
However, if your holdings are in any way complicated, you might need the services of a certified appraiser. You will pay for this, but the alternative could be an IRS hassle that would be equally costly and time-consuming.
The real issue here, our experts say, is the motive behind the appraisal. The higher the appraisal upon the death of the first spouse, the lower the potential taxable gain to the surviving spouse if there is a sale of those properties. If the IRS believes that, upon the death of the first spouse, the properties have been appraised with this in mind, you can expect questions. However, if you play it straight, you should have clear sailing no matter what method of property appraisal you use.
