Are Commercial Real Estate Loans Assumable?

By Mark Hanna, CCIM

When exploring financing options for commercial real estate, a common question arises: Are commercial real estate loans assumable? The short answer is: it depends. Understanding the nuances of assumable loans can be a game-changer for buyers and sellers alike.

This is a fantastic question to always ask when you are looking at purchasing a Commercial Real Estate Asset – Is the note assumable? The reason being is if current interest rates are higher and the existing note has a lower interest rate and you can assume or take over the debt after coming to an agreement with the seller – that little interest rate gain makes your asset MORE profitable. In commercial real estate, the smart investors look at EVERY single way to maximize profitability and minimize expenses. At SVN | Hanna Solutions Commercial Real Estate, we guide our clients in maximizing their real estate portfolios. Our property management solutions instill confidence in every purchase, ensuring our clients achieve their financial goals with strategic and informed decisions about day to day management of their Commercial Real Estate Assets.

What Is an Assumable Loan?

An assumable loan is one that allows a buyer to take over the existing terms and balance of the seller’s loan rather than securing a new loan. In the context of commercial real estate, assumable loans can offer advantages for both parties involved in a transaction:

• For Buyers: Potentially lower interest rates and reduced closing costs.
• For Sellers: Increased marketability of the property.

Are Commercial Real Estate Loans Typically Assumable?

Unlike residential loans, where assumability is more common (e.g., FHA and VA loans), commercial real estate loans are often more complex. Whether a loan is assumable depends on the specific terms outlined in the loan agreement and the lender’s policies. Here’s what to consider:

• Lender Approval: Most commercial loans require lender approval before an assumption can occur. This often involves the new borrower meeting the lender’s underwriting criteria.
• Loan Type: Certain loans, like those backed by government-sponsored enterprises (e.g., Fannie Mae, Freddie Mac), may include assumability clauses. Others, like private commercial loans, are less likely to be assumable unless negotiated upfront.
• Fees: Assumable loans may include transfer or assumption fees that must be factored into the transaction.

Key Benefits of Assumable Loans

1. Preservation of Favorable Loan Terms: In a high-interest-rate environment, assuming a loan with a lower rate can save substantial costs over time.
2. Streamlined Process: Avoiding the need for a completely new loan application can speed up the transaction timeline.
3. Increased Deal Appeal: For sellers, marketing a property with an assumable loan can attract a broader pool of buyers.

Potential Challenges

1. Lender Scrutiny: Buyers must meet the lender’s financial and credit requirements to assume the loan.
2. Limited Flexibility: The existing terms may not perfectly align with the buyer’s financial goals or timeline.
3. Assumption Fees: These can reduce the cost-effectiveness of the transaction.

Practical Steps for Assumable Loans in CRE

1. Review Loan Documents: Determine whether the loan includes an assumability clause.
2. Engage the Lender Early: Open communication ensures transparency and allows time to meet the lender’s requirements.
3. Consult a CRE Expert: Work with a commercial real estate advisor or attorney to navigate the intricacies of loan assumptions and protect your interests.

Conclusion

While not all commercial real estate loans are assumable, those that are can provide significant advantages for both buyers and sellers. As with any real estate transaction, due diligence is essential. Partnering with experienced advisors can help you determine whether an assumable loan is the right strategy for your next commercial real estate deal.

If you have questions about commercial real estate loans or need assistance with your property transactions, reach out to Mark Hanna, CCIM at SVN | Hanna Solutions Commercial Real Estate. Call us at (956) 322-4001 or email [email protected] to explore your options.