Are Commercial Real Estate Loans Assumable?

When investing in commercial real estate, one major decision you’ll need to make is how to finance the purchase. Many commercial property buyers take out new loans from banks or other lenders to fund acquisitions. However, assuming the seller’s existing mortgage can also be an option in some cases. But are commercial real estate loans assumable?

The answer is – it depends on the loan. Certain types of commercial mortgages allow for assumptions, while others do not. Understanding which loans can be assumed and the potential pros and cons of assuming debt can help you make informed financing decisions when buying commercial property.

Overview of Commercial Loan Assumability

The assumability of a commercial real estate loan refers to whether the buyer can take over the existing mortgage from the seller when purchasing the property. With an assumable loan, the original terms and conditions remain and are simply transferred to the buyer through an assumption agreement.

Assumable loans are typically beneficial for both the buyer and seller. The buyer may be able to get better financing terms than with a new loan. Meanwhile, the seller can avoid prepayment penalties and other fees triggered by refinancing.

However, not all commercial loans are assumable. Whether assumption is allowed depends on factors like the loan program, lender policies, and language in the original loan documents. Common commercial loan types and their general assumability include:

• Conventional bank loans – Sometimes assumable based on lender, often require creditworthiness review.
• SBA 7(a) loans – Not assumable according to SBA requirements.
• Fannie Mae loans – Most are assumable with lender approval.
• Freddie Mac loans – Most are assumable with lender approval.
• HUD/FHA loans – Assumable through HUD’s formal assumption process.
• Hard money loans – Depends on the individual lender.
• CMBS loans – Often assumable, but can be restrictive.

As you can see, government-backed loans from agencies like Fannie Mae, Freddie Mac and HUD are generally more assumable, as are some CMBS loans. Alternately, SBA loans cannot be assumed.

Key Benefits of Assuming Commercial Loans

Assuming the existing mortgage on a commercial property you’re purchasing rather than getting a new loan offers some potential advantages

Quicker closing – Assuming a loan can take less time as you avoid applying and underwriting, This allows for a speedier closing

Lower fees – No lender origination fee must be paid on an assumption. Other costs like appraisal and environmental reports may be avoided as well.

Better terms – You may be able to assume a loan with better terms than you could get on a new mortgage currently.

Increased leverage – If there is existing low-leverage debt in place, you may be able to take on supplemental financing for added leverage.

Avoid prepayment penalties – The seller can transfer the loan to you to sidestep expensive prepayment fees if they want to sell before maturity.

Easier to qualify – Loan qualification requirements may be less stringent for an assumption compared to a new loan application.

For these reasons, assuming an existing commercial loan can be more attractive than getting your own financing. But there are also some potential drawbacks.

Factors to Consider Before Assuming Commercial Debt

While assumptions offer benefits in many cases, they aren’t always the best move. Some key considerations include:

Loan terms – If the existing loan has unfavorable terms compared to current market rates, a new loan may be better.

Lender restrictions – The lender may impose strict qualification requirements or limit additional financing.

Prepayment clauses – Even if assumable, the loan may have yield maintenance or defeasance required if you want to refinance before maturity.

Assumption timing – After closing, you may have to wait 12 months or longer before being allowed to assume.

Interest rate environment – Rising rates reduce the appeal of assumptions if the existing loan is at a lower fixed rate.

Fees to assume – Assumption can still involve fees of 0.5% to 1% of the loan amount.

Weighing the pros and cons of assuming against getting new financing for your specific situation is important.

Tips for Getting a Commercial Loan Assumed

If you determine that assuming the seller’s debt is the right move, here are some tips to help get the assumption approved:

• Review the loan documents – Verify that assumption is permitted and understand any lender requirements.

• Consult with the lender – Discuss the process and your qualifications early to uncover any potential issues.

• Maintain reserves – Lenders often want to see 6-12 months of debt service in reserves even on assumptions.

• Provide paperwork – Have financial statements, tax returns, and other documents ready for lender review.

• Meet borrower requirements – Your financial profile should align with the original borrower’s as closely as possible.

• Get professional support – Work with a commercial loan broker or attorney experienced with assumptions.

With proper preparation and meeting lender requirements, you can often successfully assume commercial seller financing.

Types of Commercial Loans That Are Typically Assumable

While loan assumability depends on specific policies, there are certain commercial real estate financing programs where assumptions are commonly permitted after lender approval:

Fannie Mae Loans

Most Fannie Mae multifamily and commercial property loans are open to assumptions. For example, all Fannie Mae fixed-rate multifamily loans can be assumed subject to review. Fannie also offers supplemental loans that can be combined with assumptions for added leverage.

Freddie Mac Loans

Freddie Mac conventional multifamily loans are assumable but still require full underwriting of the new borrower. Freddie offers standard supplemental mortgages as well. Small Balance Loans under Freddie Mac also allow assumptions in most cases.

HUD/FHA Insured Loans

FHA multifamily and healthcare mortgages can be assumed through HUD’s formal mortgage assumption process. These include 223(a)(7), 223(f), 232, 241(a), and 232/223(f) loans. Assumption fees range from 0.05% to 1% of the loan amount.

CMBS Loans

Many securitized commercial real estate loans that are packaged into CMBS can be assumed. However, the loans are also subject to additional restrictions and requirements compared to agency loans.

Life Company Loans

Depending on individual lender policies, some commercial loans held by life insurance companies may allow assumptions. But more restrictive qualification requirements often apply compared to agency loans.

By focusing your search on properties with assumable debt from these lender programs, you can maximize your chances of being able to take over the seller’s financing.

Final Thoughts on Commercial Loan Assumptions

Assuming an existing commercial mortgage from the property seller rather than taking out new financing can allow for faster closings, lower costs, and better loan terms in many cases. But loan assumptions aren’t for everyone or every property. Carefully assessing your specific situation, analyzing the loan terms, understanding any lender restrictions, and weighing the pros and cons is key to determining if an assumption aligns with your investment objectives.

With the right property, loan, and lender, assumptions can be a creative way to secure high-quality commercial real estate financing. But just remember to do your due diligence before deciding to assume a commercial loan.