Amidst rising interest rates, commercial real estate owners are exploring refinancing to capitalize on lower rates before they potentially climb higher. However, the refinancing process is complex, requiring substantial fees and financial analysis. This article provides commercial owners with an in-depth overview of the multifaceted decision points around refinancing, arming them with analysis frameworks to determine if refinancing is optimal for their specific property’s financial situation. If you happen to be someone seeking a Commercial refinance Jacksonville, Commercial refinance Cocoa, or commercial real estate bridge loan Columbus, OH, BridgeWell Capital might be an option you may want to consider.
When to Consider Refinancing
There are several scenarios where refinancing a commercial real estate property can make good financial sense:
- Interest rates have dropped substantially since you obtained your original mortgage. Refinancing at a lower rate reduces your monthly payments.
- You want to pull out some of the equity in the property for other investments or expenses. Cash-out refinancing allows you to tap into your real estate equity.
- Your original loan term is too short and you want to extend it. Refinancing resets the loan term back to 30 years potentially.
- You want better loan terms like removing a prepayment penalty or shifting from variable to fixed interest rate.
The Refinancing Process
Here are the key steps to commercial estate refinancing:
- Find a lender – Connect with banks, credit unions, and private lenders to find the best refinance loan options. Broker relationships help.
- Submit loan application – Provide financial, tax, occupancy, and other property details to apply for the refinance.
- Obtain appraisal – The lender will order a new appraisal to confirm the property value supports the refinance loan amount.
- Get loan approval – The lender underwrites the new loan based on property value, your finances, and other risk factors.
- Review loan terms – If approved, carefully compare the refinance terms to your existing mortgage. Calculate the costs vs. savings.
- Close on new loan – A title company handles the property title transfer and loan closing procedures. The old mortgage is paid off.
With a cash-out refinance, you replace your existing commercial loan with a new one for a higher amount. The proceeds above your old mortgage payoff go directly to you in cash. You can use this money any way you wish.
Cash-out refinancing makes sense when:
- You have significant equity built up in the property.
- You can get a lower interest rate or better loan terms.
- You need capital for other investments or business purposes.
Just keep in mind that cash-out refinancing comes with risks. Be conservative with the cash-out amount, and make sure your property income can support the new higher mortgage.
Closing on a refinanced commercial loan will incur various fees that get wrapped into the new mortgage:
- Lender origination fee – Usually 0.5% to 2% of the total loan amount. Covers the lender’s administrative costs.
- Appraisal fee – $3,000 to $5,000 for a commercial appraisal. Required by the lender.
- Legal fees – Vary based on the amount of legal work required for the new loan.
- Title insurance – Typically $1,500 to $5,000 to insure the property title transfer.
- Recording fees – Charged by the local government to record the new mortgage documents.
- Prepayment penalties – This may be due if refinancing before the lock-out period per your current loan.
Build all these closing costs into your refinance analysis to see if the monthly savings outweigh the fees.
Refinancing to Lower Payments
Refinancing follows a similar roadmap to getting your first mortgage, but it goes faster since the property value is already established. The basic steps are:
- Get a lower interest rate – If rates have dropped at least 1% to 2% since you got your original mortgage, refinancing can lower your interest costs substantially.
- Extend the loan term – Refinancing starts a new 30-year payment schedule. This drops the monthly principal and interest payments.
Crunching the numbers is key here. Calculate your break-even point where the lower payments offset the closing costs. Target a breakeven of 3 years or less.
Risks to Avoid
While refinancing commercial real estate can make good financial sense in many cases, there are some risks to avoid:
- Cash-out refinancing too much equity, leaving too little cushion.
- Accepting significantly higher monthly payments to get cash out.
- Refinancing from fixed to variable rate loans in a rising rate environment.
- Refinancing multiple times over a short timeframe, incurring excessive fees.
- Not thoroughly reviewing the new loan terms and fees.
As with any major financial transaction, educate yourself, run the numbers, read the fine print, and seek expert guidance to make smart, informed refinancing decisions.
When to Work With a Professional
Commercial real estate financing can get very complicated. Working with a professional advisor can be wise in these situations:
- You are refinancing a large ($5 million+) or complex property.
- You need a cash-out refinance of more than 50% of the property value.
- Your property has leased areas to multiple tenants.
- You want to refinance to a different type of loan like an SBA loan.
- You have a limited timeframe to close the refinance transaction.
Experienced commercial mortgage brokers and real estate attorneys have deep expertise that prevents mistakes and helps structure optimal terms for your situation.
If done strategically, refinancing commercial real estate can provide a major opportunity to improve your financial position as an investor. Follow the tips above to navigate the process successfully and maximize your returns.