Commercial real estate can be a lucrative investment, but it’s important to know when to refinance. In this complete guide, we’ll go over all the factors you need to consider before refinancing your commercial property. We’ll also discuss when refinancing makes sense and how to get the best deal on your loan. So whether you’re just starting in commercial real estate investments or are considering refinancing, this guide has everything you need!
For a variety of reasons, including the desire to take advantage of the equity you’ve built in the property and the possibility of obtaining a lower interest rate, business property loans are often refinanced.
- Refinancing is the process of adjusting the terms of an existing loan by switching lenders or adjusting the interest rate or payment terms.
- When applying for a refinance loan, a borrower’s or lender’s credit, and repayment history are reviewed again.
- Mortgages, automobiles, and education loans are just some of the common types of consumer debt that may be refinanced.
What does it mean to refinance a commercial property?
Commercial real estate (CRE) refinancing, at its core, is functionally analogous to refinancing a mortgage on a residential property. Refinancing is when you take out a new loan to pay off an older one. Borrowers frequently engage in loan refinancing when they become eligible for more enticing terms than their current loans provide.
Why refinancing commercial real estate makes sense
By refinancing, commercial property owners can tap into their equity. The money will be used for whatever the investor deems most important at the time. It all depends on how much the property is worth, or how much its value has increased or decreased since the time it was first purchased.
Top Reasons to Refinance Commercial Real Estate
1. Improve Cash Flow
One of the most common motivations for a commercial property owner to pursue a refinance is to increase their cash flow. With interest rates as low as they are today, borrowers can free up more money each year by paying less on their debt. In addition, the amortization period can be extended by an additional period (up to 30 years).
2. Consolidating Debt
Borrowers typically have a portfolio consisting of several commercial properties. The property owner can balance the weaknesses of one property with the strengths of the others in the portfolio by refinancing and consolidating their mortgages into a single loan. Advantageous pricing, amortization, and fee reductions may become available to the owner as a result of this action.
3. Borrowing Prepayment Fees
Because of the prepayment premium attached to the payoff of a commercial loan, most borrowers are hesitant to refinance their property before the maturity date. The current low-interest rate environment makes prepayment of loans with maturities within the next two to three years a viable option. It’s possible that you could quickly recoup the cost of the penalty if you refinanced at a lower interest rate, resulting in a smaller P&I payment.
4. Getting out of an Adjustable Rate Loan
Variable conditions cause interest rates on adjustable-rate loans to shift over time. Owners can significantly lessen portfolio risk by switching to a fixed-rate mortgage. By locking in today’s low-interest rates, you can protect yourself from future fluctuations.
5. Lock in Lower Interest Rates
You can usually lock in your interest rate with a refundable good-faith deposit when you submit your application. You can take advantage of the current low-interest rate environment to lock in a low fixed-rate loan for 10 years or more rather than refinancing your property every few years in an unstable market.
6. Invest in Property Improvements
By refinancing your commercial property, you can free up funds for renovations, repairs, or remodeling. This will improve the overall condition of your property and possibly even increase its value, depending on the type of improvements.
7. Expand Your Investment Portfolio
By taking out a line of credit through refinancing, you can use the money to purchase additional properties or buy into other investments. This can help diversify your portfolio and grow your wealth over time.
8. More Favorable Loan Terms
Mortgage refinancing allows you to negotiate more favorable terms for your new loan. If you want to lower your monthly payments, you can extend your repayment period. If you want to pay off your property sooner, you can shorten the repayment period. You could also refinance your mortgage from an adjustable to a fixed rate. The savings from that alone might make refinancing worthwhile.
How to Refinance Commercial Property
To refinance a commercial mortgage, it is necessary to demonstrate both creditworthiness and the ability to repay the loan. The fact that you were approved for a mortgage in the past is no guarantee that you will be again, especially if your company’s financial situation has changed. There may be many more layers of documentation and even personal guarantees needed to secure a commercial mortgage refinance loan.
Get Your Financial Records In Order
The company’s financial state must be described at the very least. For a minimum of two years, you’ll need to compile and submit your company’s tax returns, cash flow records (such as bank records), profit and loss statements, and financial statements. Provide at least a year’s worth of financial data. Commercial real estate lenders may also require an in-depth business plan and executive summary that details the company’s strategy for growth and introduces the company’s leadership team with bios that highlight their experience and track record.
Know the True Cost of Credit
The interest rates on business loans are higher than those on personal loans. Consequently, the appraisal itself could set you back $2,000 to $5,000, or even more for larger properties. In the absence of sufficient equity, the bank will not issue a loan for the purchase.
In addition to the interest on the loan itself, you will also have to pay for things like inspections, loan origination fees, and closing costs. In addition, the time and resources used to organize and manage the refinance are lost earnings.
Take Care That Your Refinancing Saves You Money
Find out if refinancing will save you money.
The typical origination fee for a commercial loan is one percent of the total amount borrowed. The origination fee for a loan of $1,000,000 is $10,000. To calculate whether or not you will break even, you must consider this expense. There may be a two- to three-year savings lag before the new mortgage pays for itself. Assess the benefits for your company.
If the company’s profit margin is thin, the bank may require a personal guarantee on the loan in addition to the company’s financial statements. One or more of the primary owners provides a personal guarantee on the loan, using his or her property as security.
Put in a Mortgage Application
You should apply for a mortgage after you have finished all the necessary preparation. Compare interest rates, make banks compete for your business, and haggle over extra charges like origination points. Lenders will check the company’s and any personal guarantors’ credit histories as well as any additional information you provide them within your financial package. Credit, debt, and income records will all be checked by the underwriter.
A good credit history, on-time, and full bill payments, and sufficient liquid assets and income are all requirements for a personal loan as well.
What to Know Before You Refinance Commercial Property
Commercial property, in the context of real estate, refers to buildings that are occupied by commercial enterprises. This can be anything from a storefront to an office building. On the other hand, large apartment buildings are also considered commercial property.
Pros and cons of a commercial property refinance
Found below are some of the pros of a commercial property refinance:
In some cases, it may be possible to reduce your regular payment amount.
Refinancing is typically pursued by borrowers in search of a lower monthly payment. The most common way to accomplish this is to refinance your mortgage to a lower interest rate.
A more favorable loan agreement may be possible.
If you are a commercial property owner, you may also benefit from adjusting the loan’s repayment term or type. If you have an adjustable-rate loan, refinancing into a fixed-rate loan could give you payment stability if interest rates rise.
If you do this, you may be able to avoid making a large balloon payment.
For commercial loan refinance, large balloon payments one-time payments for the remaining loan balance, are an option. The reason for this is that commercial loans typically have shorter repayment periods (five to twenty-five years vs. thirty for a residential mortgage). You can avoid making such a large initial outlay by refinancing your commercial property.
Taking out cash through a refinance doesn’t incur any tax liability.
A cash-out refinance is a type of commercial real estate loan refinancing in which the borrower takes out a larger loan than their current outstanding loan balance. The money is put to use by many CRE investors in two ways: either maintenance or expansion.
Found below are some of the cons of a commercial property refinance:
The initial investment is substantial.
Commercial property refinancing closing costs are similar to those of the original loan. Check to see if the money you’ll save with your new loan will be enough to cover the costs of getting it.
Some kinds of commercial property loans are not eligible for refinancing.
As it stands right now, current U.S. The United States government-backed 504 loans from the Small Business Administration (SBA) are not eligible for refinancing. See if your current loan program has similar requirements by contacting your lender.
Some lenders, including the SBA, impose a prepayment penalty for early loan payoff that can significantly increase your out-of-pocket expenses.
Commercial property refinance loan types
Commercial Refinance Loan Types
Before reaping the benefits of refinancing, investors must carefully consider the various types of commercial real estate mortgage loans.
Traditional Commercial Refinance Loans
Traditional commercial loans are the most popular choice for refinancing. Typically, borrowers use this type of loan to switch to a mortgage with a more favorable interest rate. The mortgage on the property may have been refinanced to have similar terms to the new loan, but with a lower interest rate.
Commercial Cash Out Refinance Loans
Commercial property owners who want to borrow more money than they currently owe on their mortgage can do so through a cash-out refinance loan.
After getting approved for a cash-out refinance of a commercial loan, you will receive the funds from the difference between the new loan amount and the amount still owed on the property. Some lenders place restrictions on how the money can be used, but in general, you’re free to spend it as you see fit.
This refinancing option is ideal for homeowners with a lot of equity in their property. Commercial real estate loans are one commercial lender that mandates a minimum of 25% equity.
Commercial Mortgage Bridge Loans
A commercial mortgage bridge loan is another option for an investor.
Business owners can “bridge the gap” until permanent financing is found by taking out a commercial bridge loan. The average duration of a bridge loan is two years.
Most of the time, they take the form of interest-only loans with a large balloon payment due at the end. Typically, a one- to three-percentage-point premium is added to the market rate for a bridge loan.
A bridge loan is a short-term loan used to pay for repairs and improvements to a property that would otherwise not qualify for a mortgage, usually so that it can be sold or for longer-term financing to be obtained.
Commercial Refinance Lenders
While conventional banks are a common first thought, there are many other types of lenders that offer commercial real estate refinancing loans.
If you’re in the market for a new loan, here are some of the things you should look for.
Traditional Commercial Banking Institutions
Refinancing commercial real estate through a conventional bank is the simplest option.
In addition to the aforementioned institutions, traditional commercial banks like Wells Fargo, Bank of America, JPMorgan Chase, and KeyBank also offer assistance in refinancing commercial real estate.
Loan terms from different commercial banks are usually only a few base points different from one another. It’s best to start with the bank with whom you already do business because they may have special loan programs for loyal customers.
Hard Money Lenders
When conventional bank refinancing isn’t an option, some investors will turn to a hard money lender.
There is a wide range of hard money lenders available who focus on different loan amounts and types of risk. Loans from hard money lenders may not have the best interest rates or terms compared to those offered by traditional banks, but they can be helpful in times of financial emergency.
The two halves of an SBA 504 loan close at the same time. Both loans are from non-profit organizations; one is from a standard bank, and the other is from a community development bank (CDC). The maximum amount you can borrow on an SBA 504 loan is $14 million, and the loan term can be as long as 25 years. Similar to SBA 7(a) loans, an SBA 504 loan allows for a maximum loan-to-value (LTV) of 90%.
All Small Business Administration loans, including the SBA 504, have rigorous prerequisites. Read this SBA 504 loan application guide before you apply. When considering an SBA 504 loan, it is important to follow these three guidelines:
- One must be the owner to live on the property.
- Create employment opportunities immediately.
- The company’s total assets may not exceed $15,000,000.
Since an SBA 504 loan requires a relatively small initial investment, it’s a great option for a young business with limited funds that need to purchase commercial property. Businesses that aren’t in a rush to move in may benefit from the longer closing time, which can be up to two months.
Tips for unlocking the equity in your commercial property through refinancing
1. Take advantage of the broader real estate market
Despite the tighter underwriting standards many lenders are now adhering to, the real estate capital markets remain fluid. However, future outcomes may be affected by the Federal Reserve’s actions (such as a hike in interest rates).
The Federal Reserve has signaled that it intends to implement quantitative tightening policies to reduce the cash supply in the economy and raise interest rates several times through 2023 to combat inflation.
The market may still offer attractive refinancing opportunities, though. It may take more time and investigation into the current process to find such openings. To keep you as a customer, your current bank might be open to the idea of approving a new real estate loan.
However, your financial needs may be better served by a particular lender over another, depending on factors such as the size of your loan, the nature of your assets, your borrowing history, and your desire for a degree of flexibility. If you consult a wide variety of lenders, you increase your chances of getting the best possible terms.
To tap into the real estate capital markets, one must have ready access to a large pool of lenders and the knowledge to compare and contrast the qualifications and terms offered by each. Many business owners see hiring a trusted advisor to manage the mortgage brokering process as the most prudent course of action. Due to their extensive network in the industry, real estate agents have access to more listings and better bargains on their client’s behalf.
2. Take a look at non-traditional financing options
To avoid leaving money (or other benefits) on the table when approaching your lender, you should first investigate all of your available options.
Sale-leaseback financing, for example, can provide up to 100% of the value of the property, whereas conventional financing is limited to loan-to-value ratios of, say, 50% to 75%. Owner-operators can sell their building and continue using it by leasing it back from the new owner through a sale-leaseback transaction. This allows you to keep full ownership of the property while still making money off of it.
Policy initiatives at the national and state levels
Additional funding for building owners was available through federal and state programs even before the pandemic. Property owners can rely on us for a variety of services, including assistance in securing brownfield funds for cleanup and redevelopment and advice on the viability of PACE financing for energy-saving improvements.
As economic growth remains a top priority for many communities, many local governments have created incentives for businesses already operating within their borders to grow or relocate.
3. Don’t be afraid to advocate for your property
Lenders are being much more meticulous in their examination of prospective borrowers since the Great Recession of 2009 and the subsequent Dodd-Frank Act of 2010. Lenders’ ongoing evaluation of the post-pandemic lending landscape has made this problem even more acute in recent years. The pricing of loans can be significantly adjusted by many lenders in response to “red flags” regarding borrowers or the underlying collateral. However, by being proactive and taking part in the due diligence process, you can greatly increase the efficacy (and efficiency) of the refinance.
The value of a loan may also be affected by the lease rate, even if the lease is to a related party. The lease’s value can be increased by negotiating more favorable terms before approaching a lender to refinance.
Understanding how to deal with typical concerns is a great way to overcome roadblocks and complete the refinancing process without a hitch. Similarly to the mortgage banking process, owners may find that the assistance of a real estate consultant is instrumental in securing more favorable lease terms and expanding involvement opportunities.
Want more information on the best way to buy commercial real estate? Check an article that I wrote about it, here!
Fees and costs to refinance a commercial property
Knowing the refinancing costs in advance can help you decide if it’s worthwhile to refinance a commercial property. When refinancing a commercial property, borrowers typically incur the following closing costs:
|Prepayment penalty||Varies by lender|
|Guaranty fee||0.25% to 3.75%|
|Credit report fee||$50 to $150|
|Application fee||Varies by lender|
|Origination fee||1% or more of the loan amount|
|Appraisal fee||$2,000 to $4,000+|
Penalty for prepayment.
In order to avoid paying a penalty, some loan companies have prepayment fees. When interest payments are late, this fee is applied to cover the cost. Prepayment penalties on SBA 7(a) loans, for instance, are set at 5% of the loan balance for the first year. But after that, the price goes down.
A fee for providing a guarantee.
Lenders will charge you an extra 0.25 percent to 3.75 percent to cover the SBA’s guarantee fee on your loan. This fee is calculated as a percentage of the loan amount and is only due on the SBA-guaranteed portion of the loan.
Cost for a credit report.
Borrowers should expect to pay for credit checks conducted by lenders with the three major credit bureaus (Equifax, Experian, and TransUnion). This cost is negligible, typically falling within the $50-$150 range.
Cost of applying.
It may cost you money for some commercial real estate lenders to process your loan application. Your loan’s approval status has no bearing on this fee’s payment. Lenders set their own rates for commercial loans.
The cost incurred at the point of origination.
To cover the expenses incurred in processing your loan refinance, many lenders will charge you a fee. The origination fee is typically a percentage of the total loan amount rather than a set amount. Typically, Origination fees on a commercial mortgage refinance loan typically range from 1% to 2% of the total loan amount.
Compensation for expert opinion.
If you want to refinance a commercial property, you’ll need to hire an appraiser to determine the property’s market value. The reason this fee is higher for commercial loans is due to the greater complexity and amount of information required to produce an accurate appraisal report. Costs for commercial mortgage appraisals typically run between $2,000 and $4,000, though this range can be wider or narrower depending on a number of factors.
When To Refinance Commercial Real Estate FAQs
How long do you have to wait to refinance an investment property?
Investors may have to wait up to six months after the purchase date to refinance a rental property.
How long do you have to wait to refinance a commercial loan?
Most mortgages have a 30-year term and an amortization schedule that lasts that long. Even though commercial loans may have a 30-year amortization period, they eventually pay off. They run their course after five to ten years, at which point the borrower has the option of paying off the loan and/or selling the property.
How do I take equity out of my commercial property?
The equity you’ve built up in a commercial property can be used as collateral for a loan. Banks are the most common source for these loans, but private lenders also exist. For business owners who need extra money for things like bill payments or expansion, commercial equity financing is a great option.
Does refinancing commercial property hurt your credit?
While refinancing will hurt your credit score in the short term, it could prove beneficial in the long run. Lenders prefer debtors who have refinanced because it reduces their total interest and payment obligations. In most cases, your credit score will drop by a few points, but it usually recovers within a few months.
Is it difficult to refinance an investment property?
It’s not hard to refinance a loan on a rental property, but you should be ready for the process. In other words, you need to know your financial standing inside and out, have all of your financial paperwork in order and do your research before choosing a lender.
If you are interested in refinancing your commercial real estate property, I urge you to call me or schedule a free consultation today. My experienced team will work with you to evaluate your specific situation and needs to determine if now is the right time for you to refinance. I understand that this can be a difficult and confusing process, which is why I am here to help guide you through it every step of the way. Don’t wait – call me today!