How to Analyze the Commercial Real Estate Refinance Decision

Even the most experienced property owners may wonder when the time is right to refinance commercial property. While the benefits are clear – lower interest rate, lower payments, cash-out – refinancing may mean moving to a new lender and all the headaches associated with that process.  However,  since you already own the property it’s often easier to refinance than it was to obtain the original acquisition loan.

If you are refinancing out of a private, bridge or hard-money loan, chances are your interest rate will drop considerably.  However, this does not necessarily mean your payment will decrease, since most private and bridge loans are interest-only and most permanent loans will amortize over 10 to 30 years.

Refinance Decision Guide

If you can respond “yes” to all or most of the following statements, it is probably worth speaking to your lender or loan advisor about refinancing your commercial property:

  • Your interest rate is .5% higher than the market rate (Use the Genarater to find out).
  • You expect to own the property for another 5 years and want to lock in historically low interest rates.
  • You want to take cash out of your property.
  • You have a balloon maturity in 12 months or less and don’t want to sell the property and don’t have the cash to satisfy your balloon obligation.
  • You want to work with a lender who is more flexible/easier to work with than your existing lender/servicer.
  • You want to fund significant capital improvements/property renovations.
  • You want to recoup your renovation costs and secure additional equity.

Is it worth the expense?

While the benefits of refinancing are clear, there are costs – both real and intangible – that should also be considered in the refinance cost/benefit analysis:

  • As with acquisition loans, you will be responsible for funding the cost of standard third-party reports (e.g. appraisal, survey, environmental) and legal fees that many lenders require.  In addition, many fixed-rate CRE loans carry prepayment penalties that apply during a fixed period of time.  Most loans are open to early prepayment without penalty during the six months prior to maturity.
  • Will the new loan be consistent with the business plan for the property and your broader personal financial objectives ?
  • Do you intend to hold onto your investment property or operate your business in the property for the term of the new loan?
  • Is there a pending life event (retirement, college tuition, wedding expenses) that may require you to liquidate your investment property?

Conclusion

As with most large financial decisions, the answer is in the details.  In today’s low rate environment, it may makes sense for many property owners to refinance even if you have to pay a prepayment penalty.  If you have any questions feel free to contact us.  Modern Funding loan specialists are here to help you make the right CRE financing decisions.