Questions to Ask a Lender Before You Refinance Commercial Mortgage

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The “language of business” is the all-important dimension that impacts your business outcomes. Among the various goals and objectives of any enterprise, financial development and expansion are considered important goals. How your business handles finances will determine your enterprise’s success in achieving other long-term goals.

Barring exceptions, most businesses always find the need to raise funds for one of many reasons. As refinancing commercial mortgages is regarded as one of the best ways to raise funds quickly, you are most likely to look at the option when in need of funds.

How does Refinancing a Commercial Mortgage Help?

Multiple reasons are attributed to businesses choosing the refinancing route. This includes the need to benefit from a lower interest rate and access to funds for expansion. However, the biggest reason could probably be the need to avoid balloon payments at the end of long repayment schedules.

Most businesses find looming balloon repayments to be extremely challenging, despite adequate information beforehand. The only way out is to choose refinancing as a way out. It is of paramount importance to understand more about refinancing before you decide. Remember, as a business owner, the urge to avail easily available funds will be strong.

When this combines with a lack of knowledge about the subject, you are likely to make a decision that may not be in your best interests. So here are a few questions that you need to ask the lender – the answers to these questions will help you get a better option. 

What is the amortization schedule?

Commercial mortgages are typically lesser in terms when compared with residential loans. This effectively means that you may have taken a mortgage that was around ten years. The original mortgage amortization schedule may have involved a “principal + interest repayment” schedule or an “interest-only repayment” schedule.

Regardless of either option, you may have had a balloon payment at the end of the tenure. A refinance option will help you steer away from the challenge of the hefty balloon repayment. However, this should not put you into a debt trap.

When you seek details of the amortization schedule, ensure that you get options for feasibly restructuring the mortgage. 

The rule of thumb that you need to follow here is to land a restructuring option that will fetch you a reduction in interest rates by around 2%. Remember, commercial mortgage refinance and home refinance are two different ballgames. In home refinance, the targeted reduction in percentage is 0.75%, whereas in a commercial mortgage refinance, this is around 2%. By asking the right questions ad choosing the best plan, you should find an option that gives you this 2% reduction.

What are the closing costs and fees involved?

There are costs involved when you opt for refinancing. For instance, a refinance will require a fresh appraisal of the property. This could work out to an average of around $4200 for a commercial property. In addition to this, you are likely to fork out processing fees that differ from lender to lender. Additionally, you will also have to bear the origination fee, which is effectively a percentage of the total refinancing payout.

While there are other costs involved, such as P&I (Protection and Indemnity), the amount that concerns the borrower is effectively the closing fees, origination fees, and the appraisal charges. With discussions and comparisons, you can identify a lender who charges lesser than the others. This is an important aspect, as you are likely to end up spending a good amount upfront, even before you see the color of money from the restructuring option.

What percentage of valuation will be refinanced?

This is a question that may have been on your mind all along. However, most borrowers leave it to the lenders to make an offer and do not typically try to find out. Remember, the refinancing’s whole purpose is to raise funds, and therefore you need to get as much as is permitted by benchmarked standards.

Typically, 75% of the valuation is the upper limit that many lenders agree to refinance. If you can get 75% out of your lender, through refinancing, then you have got yourself a good enough option. However, this can only qualify as a good choice, when all other refinance parameters are good.

Remember, it is not a good idea to tradeoff and settle for a refinancing option when just one criteria is met or fulfilled. With the right kind of questions and scouting, you can be sure of finding yourself the best option.

Will I get a “cash-out” or a “build-out” to extract value from the property value?

Essentially, there are three different types of commercial mortgage refinance plans – commercial bridge loans, commercial cash-out refinance, and traditional commercial refinance loans. If you have a mortgaged property with a present value more than the mortgaged balance, you could look at a “cash-out” option.

You can extract the value built over a period of time, which is termed as a cash-out or a build-out. Essentially, this refers to the option of raising funds against the enhanced value of the mortgaged property. The purpose is to use the funds for one of many possible use cases. For instance, you can use this to improve the property or get your hands on working capital.

If you get good cash out or build-out at lower interest rates, you can consider yourself in a win-win situation. Check out with the lender if this option is available and the applicable terms for such an option.

How does the scoring work, and how do you look at “net operating income”?

Among the criteria that form the basis for decisions regarding the actual refinance, the business credit scores, and NOI (net operating income) of the owner/business are important. Depending on the scoring agency with whom the lender has a tie-up, the ideal scores could be 160 (FICO), 80 (Dun & Bradstreet), and 60 (Experian).

You need to ensure that your business credit score is good enough to help the lender make an easy decision. NOI is another important aspect that can ease out your loan processing option. This refers to the condition where the property has acquired more value, generating improved cash flow.

For instance, a business that has rented out the property may witness increased rentals due to enhancements. This improves the NOI, which will, in turn, reflect on the capacity of the borrower to honor the repayment terms.

These are some of the questions that you need to be asking the lender when you seek a refinance option. When you start looking for a lender, it is necessary to know more about the types of CRE lenders in the markets. If you are aware of the lender category with whom you are dealing, you will have a clear expectation.

Typically, the types of lenders in the markets include traditional commercial banking institutions, hard money lenders, SBA loans, community banks, and CMBS loans. The actual amount that you can raise will depend on the type of lender that you eventually choose. Some of the lenders disburse more in terms of the property’s value, while others disburse a little less.

Additionally, the interest rates also differ, which makes it necessary to look for the best option. It would help if you had favorable rates and a choice of good terms/options when you avail of a loan. Availing a loan from a lender with whom you already have an existing relationship can sometimes be a good idea. The lender may offer a favorable deal to existing clients.

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