Negotiate the Loan, Not the Price
What’s worth more: $200,000 off the purchase price—or 12 months of interest-only payments?
Most investors focus on negotiating the price. But loan terms can change a deal’s cash flow just as dramatically. On the same $2 million building, the right financing can make a big difference:
• Interest-only — How much more cash could stay in your pocket during year one?
• Amortization — How could a longer schedule improve cash flow and borrowing power?
• Recourse — What might you negotiate to limit your personal risk?
In my example, a $200,000 price reduction adds about $12,000 in annual cash flow. Twelve months of interest-only payments adds roughly $31,000 in year-one cash—and more than doubles the cash-on-cash return, from 3.6% to 7.7%.
In this episode, I compare loan structures on the same building and explain what to ask lenders for, how to make your case, and what to watch for when the interest-only period ends.
If you’re negotiating a commercial real estate deal, the purchase price isn’t the only number you should be fighting for.
Key Takeaways:
40% vacancy can cause more than a 40% income hit. In the example, the owner loses rent and must cover operating expenses that vacant tenants previously reimbursed, reducing NOI from $300,000 to $140,000.
Vacancy can create serious cash-flow and loan pressure. The example’s DSCR falls to 0.64; the owner may need to contribute about $6,500 per month. The speaker estimates the property needs 80% occupancy to break even and 93% to reach a 1.25 DSCR.
Vacancy can sharply reduce the property’s value. At an 8% cap rate, the example’s value falls from $3.75 million when fully leased to $1.75 million based on current income. The speaker’s rule of thumb: each additional dollar of NOI adds about $12.50 in value.
Cutting rent to fill space faster can hurt the eventual sale value. In the example, lowering rent from $15 to $13.50 per square foot fills the space sooner and improves near-term cash flow, but lowers the rent roll and results in about $87,000 less five-year profit than waiting.
Free rent may be preferable to a permanent rent reduction. Offering six months free while keeping rent at $15 per square foot gives the tenant a similar effective deal, but preserves the stated rent for valuation after the concession ends.
Plan for vacancy and avoid being forced to sell. The speaker emphasizes keeping sufficient cash reserves and advises against selling with more than 10% vacancy.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Tyler Cauble
This episode of the Commercial Real Estate Investor Podcast is brought to you by my CRE Accelerator Mastermind, where you'll get access to my step-by-step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way. Go to www.crecentral.com to learn more. Welcome back to the Commercial Real Estate Investor Podcast. We are live from the Copper Group Studios in Nashville, Tennessee, for another episode of Office hours, where we are diving into some sort of aspect of commercial real estate, teaching you guys more about how to do this the right way, and also answering your questions. As you guys know, if you ever have questions on how to get started in commercial real estate, how to, you know, maybe you're working on a specific deal you have, you know, questions about, you don't know exactly what you're doing there. You're more than welcome to jump in and ask me those questions. And I've got a question for y'all today, and it's on topic for what we're going to be talking about. Which one would you fight for harder or more? Which one would you rather have? 12 months of interest only, a longer amortization, or less recourse? Let me know in the chat. I'm curious to hear what you all think before we even dive into today's conversation. Speaking of which, let's go ahead and get on into it. You should be negotiating the loan, not the price. Today, I'm going to show you why. We're going to walk through the same building, the same price, two different term sheets to show you how drastically this could actually be. With interest only, this deal comes out to 7.7% cash on cash return, and I know I'm going to get into the details of this deal here in a minute. If it was not interest only, it's a 3.6% cash on cash return. So having 12 months of interest only in this deal doubles your cash flow in the first year, doubles your cash flow just by having 12 months of interest only. It's the same price. It's the same rate. Same 65% loan to value. Year one cash differs by 30 $30,867. So basically $31,000. It's a pretty big difference, like drastic difference. Now, a lot of negotiations in commercial real estate go straight to the price, and that's not to say don't negotiate the price. Obviously, we're going to talk about yeah you need to negotiate the price, but there are plenty of situations and scenarios that you're going to find yourself in over time where maybe you can't negotiate the price, maybe the seller isn't willing to budge at all, maybe you've already negotiated it down to like as far as as they or you are able to get it to right. So that doesn't necessarily mean that the purchase price is the only lever that will make this work. Your loan terms also make a massive difference. It is the largest chunk of money that is coming into the deal, and far more often than not, I see commercial real estate investors. This is typically newer people, of course, but even people that have like three, 510, deals, if they haven't, if they've kind of you know run their head through walls and they haven't had the proper training or guidance or team involved in doing these deals with them, they may not know that they can negotiate the commercial real estate loan. Like you are fully capable of negotiating these loans. This isn't like that apartment lease that they gave you back when you were in college. That's you know nothing is negotiable. You sign it or you move on. They will negotiate this stuff, all right. And it all comes down to you know what levers you're going to pull. What's the trade off, all right? But the reason that a lot of people go straight to the purchase prices, it's the it's the number that everybody sees, right? It's the number that you think that you should be negotiating.
Tyler Cauble
And sometimes, I'll tell you this: it's so far from the truth that I've actually negotiated as the buyer to pay a higher purchase price because there are reasons to do that based on how you set up the financing. We were willing to pay a higher purchase price for this deal that we were looking at it last year. We actually ended up having to drop it because they, the seller had these long-term leases that were so far under market rate we just couldn't make it work with what we were planning on doing with it. But we were we were going to pay them about $3 million more than what I had estimated it was worth, and it turns out so did their appraisal that they had gotten too, which was funny. I told him it was worth probably eight and a half million. I think the appraisal came back somewhere between eight and eight and a half. So it said the same thing, but I was willing to pay them $11 million for it because of the financing that they were going to be offering us. It was like 10 years interest only at 5% interest. You know, non recourse. And so I was willing to pay more money for that because I knew, okay, well, over 10 years, if we're able to do all the things that we need to do, you know, the value is going to go up by like 567, million. So overpaying by 3 million today doesn't matter, and cash flow is like crazy. So I know it seems counterintuitive, but that is how important I I'd say that story to illustrate the point that that is how important it is for you to have the right financing on your deals. Another reason is that the broker is built to carry it, right? I mean, these are conversations that brokers have every day. You know, they are typically the one and only, sometimes only, expert that many newer commercial real estate investors have working for them on a deal. Of course, you should have a commercial real estate attorney too that knows how to negotiate bank loans. By the way, make sure you have one of those on your team. But typically, a broker is like the number one professional that newer commercial real estate investors think of, and brokers don't really negotiate much other than purchase prices. Now, of course, there's other terms like business terms within a commercial real estate deal that they will negotiate, but the purchase price is a big one. And you, as a buyer, even if you're inexperienced, you can kind of lean on the broker because they have negotiated a lot of these purchase prices before, right? So it's kind of an easy thing to be like, oh yeah, well let's just you know go on that, and of course, it feels like winning, you know. I mean, if you if you knock off $50,000 off the purchase price, it sounds like you've just earned $50,000, right? And yes, that's true, but I'm going to show you how big of a difference that could be if we're looking at it from the loan. Again, yes, you want to negotiate the price, right? But you should also be negotiating the loan. And I would argue that if you had to negotiate one or the other, as long as the seller is not being absolutely unreasonable in their price, the loan could actually make a bigger difference. Typically, all right. So here's what a price cut actually buys you, and this is why I say that. By the way, so year one cash added. If we're at 65% loan to value with a 20 year schedule, this is crazy. If you negotiate 25,000, this is on a sample $2 million building. Okay, so $2 million building. If you negotiate $25,000 off the price, that's $1,483 that gets added to you. Like that's how much you're taking every year is another 1500 bucks by negotiating 25,000 off. 50,000 off the price doubles that. Obviously, that gets you to about $3,000 a year. $100,000 off the price gets you to about 6000. 200,000 gets you to about 12,000. However, 12 months of interest only with no price change. This is assuming we're still paying, you know, for the $2 million building. If you get 12 months of IO, that's nearly $31,000 back in your pocket in year one.
Tyler Cauble
All right, that interest only period is critical. Now, I I hear what somebody's going to say. Okay, well, you know, $200,000 off the purchase price, you know, ends up giving me $200,000 back when we sell it. Whereas you know, interest only is just kicking the can down the road. I'm still going to have to pay back that principal. And you're right; most deals that I see, if they're going to fail, they're going to fail in that first 18 to 24 month period. Even if it takes them to month 36 to fail, it's because of what happened in the first 18 months of that project. Having that 12 to 18 months of interest only on the front end, I would say can be more critical than negotiating the purchase price down because it gives you breathing room that you might not necessarily get. I mean, even like $200,000 off the price saves you 12,000 bucks, whereas interest only for that without negotiating at all saves you 31,000, right? So basically, three times the amount of cash back into your pocket year one, just by negotiating interest only. So I mean, imagine if you negotiated 200,000 off the purchase price and you got 12 months of interest only going into this deal. All right. Now you want to make sure that you are bringing this up with your lender on the front end. You're talking to them about an interest-only period. Typically, what they want to see when you're negotiating for interest-only is that there's a reason to give you interest-only, and you know it could be as simple as, well, I just want to make sure that I've got enough cash reserves as we're getting into this project and stabilizing it before you know we put any stress on the deal. Some sometimes that's all a winner needs to hear. Cool. All right, it's all yours. Sometimes they want to see that there's some sort of lease up component or value add component. You know, if you've got a couple of spaces vacant, maybe they'll say, "Okay, well, we'll give you you know 12 months of interest only so that you can get out there, you know, find a couple of tenants, increase the NOI, and then start paying us. You could also get 18 to 24 months. Of interest only. If you're going through, you know, heavy value add, you know, renovations, construction, then lease up. All right, winners are willing to negotiate all of that with you. So on this same $2 million flex building, so these are two different financing sheets. One big difference. So we're still at the $2 million purchase price. All right, we've got a $145,000 a year NOI, a $1.3 million loan at 6.75% and a 20 year amortization with a five year call. Now I know if you're listening on the podcast, you're like, man, he's throwing out a whole bunch of numbers right now, and I'm sorry, be a lot easier for you to see this on YouTube, but you will get the point here in just a second. So structure A is 9885 a month. That is interest only, zero months, no interest only at all. All right, your year one debt service comes out to be about $120,000. Your year one cash is $26,000. So you get a cash on cash of about 3.6% Now structure B is where we have 12 months of interest only. Comes out to be about 7312 a month. Your year one debt service is $87,750. Your year one cash is $57,000, more than double the amount of cash that you are getting in structure A. Your cash on cash is 7.7% Is a massive difference between the two. And again, we're still at the same $2 million purchase price, same NOI, same loan, same interest rate, same amortization. We haven't negotiated anything else other than adding an interest only period, you can see how that would make such a massive difference for you as you're getting into this to either build up those cash reserves or to just make sure you're not putting too much pressure on the deal before you have it stabilized and have enough tenants in there makes a really really big difference.
Tyler Cauble
So that's $31,000 more cash that's in your pocket on the same price, the same rate, same loan amount, and we're talking about the difference between 3.6% and 7.7% cash on cash return year one, which especially in today's market, I mean that that makes that's a huge huge difference. The amortization also sets your loan amount, so we need to be paying attention to this because you know 20 year amortizations are typical in commercial real estate. Very typical, almost you know nine times out of 10 you're getting a 20 year am. There are times when you can negotiate for a 25 year amortization. You should always go for it. I feel like I mean I'm a big believer in going for a 25 year amortization. I don't necessarily believe in a 31. because you're probably not going to get that on a commercial real estate loan. But two, because your principal paydown is so low that you're really just paying interest. I mean, if you look at you know how a 30-year mortgage impacts a residential home like your single-family home and how much you end up paying over the lifetime of that loan-it's just not worth it. The nice thing about having a lower amortization is that you are paying down the principal faster, which means you're paying less in interest, which means you're paying less overall. I like that, but it does make your payments higher. All right, but on the reverse, if you're going from a 20-year amp to a 25-year amortization, it's going to make your payments lower, and so here is why. Again, we're still looking at the same building, same net operating income, same rate. Remember, that's a 65% loan to value, 6.75% interest rate. Our loan constant, which we talked about this a couple weeks ago on the podcast, our loan constant at 6.75% on a 20 year amortization comes out to 9.12% So that 9.12% what the loan constant is, it is the interest that you're paying. So 6.75% interest plus the principal, right? Because don't forget, you also have to pay back the principal on a fully amortizing loan. So the 6.75% interest isn't the only thing you're paying. That's what this this loan constant is 9.12% on a 20 year amortization. But your loan constant on a 25 year amortization, all things being equal, but we're just changing the amortization to 25 years is 8.29% It's almost 1% lower, which makes a pretty substantial difference to your cash flow, right? And it makes a really big difference on your debt service coverage ratio. So your max loan, we're going to do a 1.25 times debt service coverage ratio on both of these. Okay, so again, just making it simple. Your max loan on the 20 year amortization ends up being 1.2 7 million, whereas your max loan on the 25-year amortization comes out to almost 1.4 million. That is a difference of about $130,000. That's a pretty big difference. You know, that's either how much the bank is willing to give you to buy it today. Or how much they're willing to give it to you, you know, to you when you're refinancing, $130,000 in cash can make a massive, massive difference for, you know, either just again setting up enough cash in the war chest, or setting that aside for the next property, right? So, so if you're able to renegotiate some of these loan terms, and start looking at it from a portfolio perspective, from a leverage perspective of what this will allow you to do. Maybe this deal won't cash flow, you know, or maybe you're not going to be able to pay off as much of the debt over the next five years as you would if you were in a 20-year amortization. But that 25 is going to give you much better cash flow, and maybe it'll allow you to to leverage it a little bit more to cash out some more money, right? And then go buy your next deal, right? So, you know, month 13 is the part to say out loud, though, right? Because if we're going for 12 months of interest only, month 13 your payment goes up quite a bit, and we talked about you know $31,000 being the the savings in year one. Well, guess what?
Tyler Cauble
$31,000 is what you're going to be paying in addition to what you were paying in year one, in year two, right? Because that is the amount of interest that you were not paying that you are now going to be responsible for paying. Nothing was created, right? You know, we didn't really, we didn't pay down any principal. We didn't change anything. We just kind of kicked the can down the road and paid some interest on some cash we were borrowing. Right, that principal is still there waiting for you. So keep that in mind as you're jumping into these loans. Like that interest only period is for a specific reason. It's so that you can get in there and stabilize a property, build up the war chest, whatever it is, so that you know. Hopefully, year two, you've got more tenants, you've increased the NOI, whatever that is, and it's far easier for you to pay your debt service. So here's what I would fight for if you're if you're planning on negotiating your loan, which you always should be. Maybe you've already negotiated the purchase price as much as you possibly can. Maybe the seller is not willing to budge on their purchase price at all. Doesn't matter what the scenario is. All right, what to fight for in order? In my opinion, go for a 12 months of interest only. Right, 12 to 18 months if you can. Like 18 months if you can justify it. Never hurts to ask. Like here's the thing: asking is free. Ask your lender if they'd be willing to do 18 months of interest only. Doesn't hurt to ask. They'll probably say no. We'll do 12. Cool. All right. We landed exactly where I would like to be. Then I would go for a longer amortization. Right. The difference between a 25-year amortization and a 20-year amortization is worth about $11,000 a year in the scenario that we were diving into on this episode. That's a pretty big difference. And I don't know about you, but I would like to have another $1,000 a month in my pocket just by negotiating it to a 25-year amortization. You can get to that point. Now you're going to have to prove to the lender why this should take a 25-year amortization, the reason that lenders like 20-year ams is because you're paying down the principal faster, which means that their risk is being decreased faster. So how can you de-risk this investment for them? Think through that. It could be as simple as, hey, you know, I will personally guarantee it. You're probably going to be personally guaranteeing it anyway, but maybe that would help. It could be, hey, you know, my business is moving in here, so we're going to be owner occupying it. And while we won't be owner occupying 51% my business is always going to be here. So, you know, this is a very hands on thing for me. Maybe they'd be willing to work with you on that. Maybe it's you know we've already got a tenant that we're signing a lease with. You know here's the LOI. Here's here's the the letter of intent that we're working on, so that we know that this income is going to be coming in. Whatever you can show the lender to show them to tell them that you are de-risking the investment for them. That is how that's what gives you leverage in these negotiations with them. When you realize at the end of the day that the lender is on your side and all they want to do is take the least amount of risk, that that's that's when you start to realize what you should negotiate and kind of what angles you should take with them. And then, of course, less recourse. It is going to be very difficult for you to negotiate lower recourse on any of your loans, if you're first getting started, if you don't have a track record, and if you don't have a lot of assets, and if you don't have a proven, you know, record of doing these deals. However, once you have all of that, it becomes a lot easier. Banks kind of start to realize, like, okay, well, maybe we don't need a full personal guarantee because he's got 30 of these. He's clearly done it before. They know what they're doing.
Tyler Cauble
It could be, oh well, you're bringing 50% down. I don't feel like I need to have a personal, you know, like we don't need personal recourse in this because if we just foreclose on the property, we've got more than enough, you know, room built in there for us to feel comfortable with it. Lots of reasons. A bank would go for that. So anyway, breaking down the whole episode, what I really wanted to show you guys is: yes, of course, you should negotiate the price. You should never not negotiate the price, but sometimes you get to to an impasse where that's no longer the only option for you. All right, the same price, 12 months of interest only, a $31,000 difference. Right, your cash on cash jumped from 3.6% to 7.7% and the only thing that changed was adding the interest only. Right, the other thing that you can negotiate, of course, is the amortization. All right, so that is it for this month's dive into loans. Let's get to y'all's questions, comments, concerns. Still want to know which one would you fight for more? Are you going for the interest only, a longer amortization, or are you going for less recourse? Let me know in the comments. Hunter saying good morning, good morning, good morning, Hunter. What's going on, dude? How are you? Ted Bowers saying good morning. Cherry, the commercial compass is saying less recourse. I like that less recourse. You know, hey, you're taking less risk on it. Yeah, there's less for you to be personally liable for. Let's see. Ted is saying good morning. Good morning, Ted. Jason, good morning, sir. Good to see you. Saying he's one of Tyler's students. Jason is. We just had a call last night, actually, and Jason was on it. He's saying, please send me your commercial or residential deals that you need help with. Let's JV some commercial opportunities. He's asking in commercial who typically pays the closing costs. No sellers seem to want to split the cost. I mean, Jason, it depends. Like honestly, it depends on your local area, which is kind of funny. I've found that it it varies depending on where we are, where we're closing deals. Now in Nashville, it's very common. Closing costs are split 50-50. Buyer pays theirs, seller pays theirs. So you know, I would I would talk to your commercial real estate attorney and ask them, or your local title company and ask them what is typical in the market. By the way, become friends with your your title company. They're like the underworld of real estate, not just commercial of like real estate overall. They know everything that is going on, so get some good information. Jason, saying when you wholesale a deal, do you double close or assign? What's the benefits of both? My attorney says to always double close, and residential, I assign all my deals. Jason, I typically stay away from commercial wholesaling. It's just not a very common practice, you know. Like there's there's arguments to both, right? Like if you're if you're doing the double close, there's a a chain of custody. There's you know, I mean, again, I'm not a wholesaler, but I know that there's a reason that some people will double close versus assign. Is is there can be a little bit more liability protection for one option over the other? You know, the double close, you're not having to disclose to the seller that you're wholesaling, which some people like. I guess I don't know. I really don't know too much about wholesaling, to be honest with you, Luke, what's going on, dude? He's saying I negotiated the following yesterday: 25-year amortization, 7% 8020 LTV, debt service coverage ratio of 1.15. Wow, that's pretty solid, man. $32,000 in prepayment penalty, but big one was interest only for the first year. So, debt service coverage ratio day one is 1.33 and 1.22 once it fully kicks in with 8% vacancy left to be filled. That's great, man! Congrats. That's on a commercial office building. He's saying that is exciting, dude. That is exactly the type of loan that we're talking about here. That's what we should be looking for. Kevin is saying good morning from Northern Virginia. Good morning, Kevin. Glad to have you here, my friend. Appreciate you guys.
Tyler Cauble
Hopefully, that was that was informational on diving into commercial real estate loans and and at least what what levers you have to pull as you are getting into those negotiations because the purchase price isn't the only one. It's not the only number that you should be thinking about, your loan terms can really determine. Even if all other terms stay equal, your loan can completely change a deal, and in some cases, get me to where I'm willing to overpay for a deal because the loan terms are so good and strong and worth it. Thank you guys for joining us every Tuesday, 830 a.m. Central Standard Time. We're going live, and we are doing office hours, answering your questions, teaching you guys about commercial real estate. One thing that we're going to be starting here pretty soon. I am going to start doing some more live underwriting. You guys always seem to enjoy it whenever we do that, so we'll start doing some of that more. And we are now about to release a full demo for the CRE Central Pro software that we have out there. We've been letting you use the free deal analyzer for a little bit. We're going to move it to a full software suite demo, free, no credit card required, just so you guys can get in there and check everything out and have the full Series Central experience. So keep an eye out for that. The TylerCabble.com/Analyzer link will still work. It's just going to redirect you to the demo page. And if you want to learn any more, just go to CRECentral.com/pro. It's a great set of software. It's really really cool what we've been able to create, and I'm really really happy with it. Awesome, appreciate you guys. We'll see you on the next one. This episode of the Commercial Real Estate Investor Podcast is brought to you by my CRE Accelerator Mastermind, where you'll get access to my step-by-step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way. Go to www.crecentral.com to learn more.