Digging Deep into Commercial Refinance Loans


If you’ve even begun your research about commercial real estate investing, you probably have realized by now that the game is so much about lending the right kind of loan at the right time.

Let’s face it – you will not have all the funding that you’ll need in order to make transactions (Well, unless you’re only planning to buy a residential property and have enough savings riled up).

So, your best bet at commercial real estate investing success is to be aware of the financing options that are available to you. We cannot talk about commercial real estate lending without talking about Commercial real estate refinance options.

This blog is an overview that will explain everything you need to know about commercial real estate refinancing. And moving further, we’ll also tell you the best cases or scenarios where it makes perfect sense for you to avail Commercial real estate refinance loans.

What is commercial real estate refinance loan?

Basics first. What is commercial real estate refinance loans? Commercial real estate refinances loans that are used to get rid of an existing loan liability by paying it off and having a new loan.

These loans are usually short term in nature, having a period from 6 months to 3 years, which are usually used and applied for cases where immediate funding is needed for short term until a more permanent form of financing is made available.

On the other hand, Commercial real estate refinance loans can also be of long term nature, ranging anywhere between 3 years to 25 years, where the amortization rates can be quite similar to that of residential properties, except that there are big balloon payments at the end of the term.

Put it simply, refinancing is a way through which an original loan on a property is replaced by the new loan.

Investment property owners of all sizes, from single property owners like the traditional mom and pop investors to savvy Commercial real estate investors and real estate investment trusts – all of them refinance their commercial real estate property for a variety of reasons.

The reasons or cases where commercial real estate refinance makes the most sense are discussed in the later section of this blog. Read on!

How does a typical commercial real estate refinance loan look?

A typical commercial real estate refinance loan will have higher rates of interest than the residential loan.

Currently, the rates of interest are hovering somewhere at 5% in the market. The rates may be higher or lower than that based on the kind of lender you will be choosing to work with. The exception to this rule would be – multi-family properties.

On multifamily properties, you can expect the rates to be a little lower as they are used for residential purposes.

Cases, where commercial real estate refinances, makes the most sense:

Here are some of the top reasons why commercial property owners choose to refinance their commercial real estate loans.

Reason # 1 – To invest in improvements to the property

In a typical scenario, a real estate investor who has just made a huge down payment towards a property with a loan to pay will have no funds to make necessary improvements to the property. He will probably wait for the rent proceeds which he will apply in clearing the due payment. But after a few months or years, when a major percentage of the loan has already been paid off, most investors refinance their loans to get extra cash which they intend to apply towards making repairs and renovations to the property. In such cases, opting for a commercial real estate refinance makes perfect sense.

It keeps you from availing a new loan, over and above the existing loan, adding more burden to your loan repayment liabilities. Instead, it sets you off your loan liabilities in relation to your original loan and gives you an opportunity to get on with making improvements to the property with the new loan you’ve availed on the basis of the equity you own in your property. And the result? You hike your chances of earning higher rents as a result of the additions or renovations you make to your property. In fact, many realtors refinance their loans on a regular basis in order to keep making newer and better renovations or additions to their properties. So, that’s the number 1 reason for opting out for a commercial real estate refinance option.

Reason # 2 – Provides investors with some extra cash-on-hand

Refinancing commercial real estate loans provides an investor with extra cash-on-hand that the investors can apply for any reason. The best part with the proceeds of this loan is that it is totally tax-free and there are no restrictions on the application of these loans. They can be used absolutely for any purpose and that’s huge freedom working in the favor of commercial real estate investors. So, instead of selling the property in case of an emergency financial need, choosing to refinance your original loan on the property allows you to capitalize on the equity you have on your property, by paying off an original loan and replacing it with the new loan that you have just acquired by means of commercial real estate refinance.

Reason # 3 – Investors choose to refinance their loans to dodge balloon payments

Balloon payments are huge payments that are made at the end of the loan period, as the last installment that will pay off the balance amount. It is usually very large and it’s surely a big burden on the investor if he hasn’t gathered his funds already. In such cases, when an investor feels like he’s not ready for making an upcoming balloon payment, he chooses to refinance his original loan, thus avoiding the big balloon payment and in turn, buying more time.

Reason # 4 – If there are better terms of the loan

Commercial real estate investors may also consider refinancing a loan when there are other loan options that are available at much better terms. For example, an investor who has an original loan with fluctuating rates of interest might be interested in refinancing it with a loan that has fixed rate of interest, which can help him plan his future loan liabilities accordingly as he knows exactly how much he shall be shelling out every month. Or let’s say, there’s a leader in the market who made an announcement to refinance the existing loans at much lower rates, investors are interested in such deals too as it works great to cut down on the loan costs.

So, if you find yourself in any of the above-mentioned scenarios, opting for a commercial real estate refinance makes the perfect sense for you.

Now, where will you find lenders who can refinance your loans?

As a beginner, you might be thinking the traditional lending institutions maybe your best go, but in reality, there are other options out there through which you can refinance your loan. Read on.

Commercial refinance lenders

1) Traditional Commercial lending institutions

This is a no brainer. The most simple way to refinance your loan is to approach the traditional lending institutions or banks. Wells Fargo, JP Morgan Chase, Key Bank and Bank of America are just a few banks that have a good name in the lending business.

All these banks have pretty much similar terms and loan eligibility requirements, and they differ slightly on some terms and conditions.

2) Private money lenders or Hard money lenders

When traditional banks turn you down or when you don’t want to avail a traditional loan for whatever reason, your next best bet would be hard money lenders.

Now, you might have to do some groundwork and research to find out the most authentic and genuine hard money lenders out there, but once you’ve found it, you’re sorted with your commercial real estate financing needs.

Many investors form solid relationships with their lenders and that goes a long way in determining the final success of a real estate investor. Especially if you’re someone with a poor credit score or let’s say you fail to fulfill the loan eligibility requirements set by traditional banks, private money lenders are your best bet!

3) Crowdfunded loans

Quite surprisingly, it is possible to refinance real estate loans through crowdfunding. Yes, you heard that right. Availing Crowdfunded loans has become popular these days although it is rather a typical form of refinancing commercial real estate.

Companies like Patch of Land, RealCrowd and CrowdStreet help investors to refinance their existing Commercial real estate loans with new loans at better terms and rates.

4) SBA loans

If you are a business owner who owns the land where the operations of your business are conducted, you can avail SBA 504 loans.

These loans suit the needs of a variety of users, from people who are looking to replace their high-interest original loan to people who want to dodge their upcoming balloon payment as discussed earlier.

Want to learn more? Get in touch with us today.

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