Takeout Loans

Takeout Loans

A permanent loan is simply a long term first mortgage on a multi-family or commercial property.  You own an office building.  Your existing first mortgage is ballooning.  You simply need a new permanent loan.

Any first mortgage loan on a commercial property with a term of at least 5 years is considered to be a permanent loan, even though it has a balloon payment.  A 10 year term is about as long of a term as most commercial mortgage lenders will go.

Permanent loans are usually amortized over 25 years, unless the property is older.  A lender might amortize a permanent loan on a 35 year old building over just 20 years, with a balloon payment after 5 or 10 years.

A takeout loan is simply a permanent loan that pays off a construction loan.

It’s that simple.  You build an office building with an uncovered construction loan; i.e., the lender does not require a forward takeout commitment.  The building is completed.  You shop around, now that the property is completed (standing) and leased, and you find a conduit that will give you a takeout loan to pay off your commercial construction lender.

Do not confuse a takeout loan with a forward takeout commitment.  A forward takeout commitment is just a very expensive letter that promises to deliver a takeout loan in the future if the property is built according to plans and specifications and leased at the target rental rate.  The typical forward takeout commitment will cost a developer one to two points, plus at least one additional point if the loan every funds.

There is so much construction money available today that very few commercial construction lenders require forward takeout commitments anymore.  And when the project is completed, there are hundreds of hungry lenders who will give a developer a takeout loan to pay off his construction loan.

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