Some commercial real estate owners choose to refinance their commercial mortgages to enjoy better interest rates, get new loan terms, or leverage the equity they have built in the asset.
Are you also thinking of refinancing your commercial building? Here are all the basics you need to know.
Commercial real estate refers to properties that house businesses and are primarily used to generate income.
Some examples include industrial spaces, retail properties, hotels, office buildings, and the like.
Sizeable residential apartment buildings are also categorized as commercial.
At its core, commercial property refinancing works similarly to residential property refinancing. It involves taking out a new loan and using the proceeds to pay off the existing one.
Borrowers typically choose to refinance if they can get lower interest rates or qualify for better terms.
Some borrowers also want to tap their equity in the property to improve their buildings or buy new commercial properties and grow their portfolio.
This is the main reason why borrowers choose refinancing. This can be achieved by securing a lower interest rate than the one you currently have.
Making the loan repayment term shorter or longer may also be beneficial for commercial real estate owners. For instance, you can refinance from an adjustable-rate loan to a fixed-rate loan if you want more predictability and security should the rate go up.
Large lump-sum balloon payments can be a burden for some commercial real estate owners. Refinancing can help you avoid it in some cases.
A cash-out refinance lets you borrow money tax-free. Many commercial lenders (including conventional banks) allow borrowers to cash out as much as 75% of their property’s current valuation. This is a tangible way for business owners to tap their equity if they need cash to improve the property or add more commercial real estate assets to their portfolio.
Remember those closing costs you had to pay when you took out your commercial mortgage for the first time? You’ll have to pay them again. So before you choose to refinance, make sure that the savings you can get from your new loan outweigh the expenses associated with getting a new loan.
You can refinance not all CRE properties. As of 2020, for example, you cannot refinance existing SBA 504 loans. Be sure to check with your lender before you make any plans.
Some banks and even the SBA charge a penalty for borrowers who want to pay off their loans early. This can further add to the costs of refinancing.
Now that you understand the advantages and disadvantages of a commercial property refinance, it’s time to learn about the different types of commercial loan refinancing programs.
The government does not back conventional loans. They’re issued mainly by traditional banks and mortgage lenders.
There are no specific loan limits, but most lenders allow borrowers to get a certain percentage of the collateral property’s value and allow an LTV ratio of between 65% and 75%.
These loans are backed by government agencies like the USDA or the SBA.
To refinance from another loan into an SBA loan, you need to show documentation that you have paid your monthly mortgage payments on time for the last 36 months (or longer).
The SBA can deny your refinancing request for reasons they deem ineligible, such that if you are trying to avoid a balloon payment.
The USDA only refinances loans for properties that are located in rural areas. The borrower also needs to be a US citizen or show a permanent residency status.
A commercial cash-out refinance loan lets you swap your existing mortgage with a new loan by borrowing a higher amount than what you currently owe on your commercial property.
The difference between your new loan amount and the amount you currently owe is paid to you at closing, in cash.
You can use the money as you see fit, but some lenders have restrictions on how the funds can be used. This type of refinancing is best suited for borrowers who have already built up a good amount of equity in their property (at least 25%).
The actual requirements will vary depending on the lender and the type of commercial refinancing loan you need. However, most lenders will require to see the following:
It’s essential to understand the fees associated with refinancing so you can decide if it’s worth the effort in your case. Here are the most common costs borrowers have to pay when refinancing CRE properties, and they vary per lender:
In 2020, commercial mortgage refinancing loan rates ranged from 3% to 12%.
Your actual rate will depend on the refinance loan you choose, the type of property you want to refinance, and your qualifications as a borrower.
Not sure if refinancing your commercial mortgage is the best move given your circumstances?
Talk to a commercial mortgage expert to understand your options.
