The balloon is almost the whole loan

Two numbers in a commercial loan look like they measure the same thing and do not. The amortization period is the schedule the payment is calculated on, often 25 or 30 years. The term is how long the loan actually lasts before the full balance comes due, often 5, 7, or 10. Borrowers read the long amortization, see a comfortable payment, and miss that the loan ends years before it is paid off. What is left on the last day is the balloon, and it is almost the entire loan.

Amortization sets your monthly payment. The term sets your deadline. When the two do not match, a balloon is waiting at maturity, and it is most of what you borrowed.

Amortization and term are two different clocks

Amortization is the fiction that you are paying the loan off slowly. A 30-year amortization schedule spreads principal and interest so the loan would reach zero in 30 years if it ran that long. It almost never runs that long. The term is the real life of the loan. A 7-year loan on a 30-year amortization makes 84 payments sized as if you had 360, and then the balance is due in full.

The early payments are almost all interest. On a standard amortizing loan, principal paydown starts small and accelerates over decades, so in the first several years you retire very little of the balance. Stop at year 7 of a 30-year schedule and you have paid down a fraction of what you borrowed.

Interest-only makes the number prettier and the risk bigger

Many commercial loans go further and offer an interest-only period, often the first few years, sometimes the whole term. During interest-only, the borrower pays no principal at all. The monthly payment drops, and so does something sponsors care about more: the cash-on-cash return in the early years looks higher, because less cash is going to principal.

That is the quiet trade. Interest-only lifts the marketed early return by deferring every dollar of principal to the balloon. A CPA reading a syndication’s projections should see that an interest-only structure is not free leverage. It is the same debt with the paydown removed and the risk pushed to maturity, dressed up as a stronger early yield.

The balloon is almost the whole loan

Put numbers on it. Borrow $10 million at 6 percent on a 30-year amortization with a 7-year term. Over those 7 years the borrower pays down roughly $1 million of principal, so about $9 million balloons at maturity. Make the first 3 years interest-only and the paydown shrinks further, to a few hundred thousand, so well over $9 million comes due. In the fully interest-only case, the balloon is the entire $10 million. The deal was never going to pay itself off. It was always going to have to refinance or sell, and the balloon is the size of that dependence.

The consequence: the balloon is a refinance you are committed to

A balloon means the deal has a built-in appointment with a future lender, and that appointment is the whole risk. Whether the balloon is a problem depends entirely on what rates and values do by the maturity date, which is exactly the thing no one controls. The deal that pencils today on a comfortable amortized payment can fail in year 7 not because it stopped performing, but because the refinance comes up short against a balloon that never got smaller. Interest-only sharpens the trap by keeping the balloon at its maximum for the years the sponsor is reporting the best returns.

Model the balloon, not the monthly payment. The payment tells you whether the deal survives month to month. The balloon tells you how much of the original loan you are betting you can refinance, and when. A shorter amortization pays the loan down faster and shrinks the balloon, at the cost of a higher payment now, which is a real trade a borrower can choose. Interest-only is the opposite choice, maximum early cash flow for maximum refinance exposure, and it should be signed with that sentence said out loud, not buried in a projection.