There are plenty of reasons as to why businesses look at refinancing their commercial real estate property. Few would be seeking for refinancing so that they decrease the strain of debt their present mortgage could be causing to their business operations. Few could be looking at extending their mortgage terms, especially the real estate owners who have hard money loans or bridge loans which would soon go up for a payoff or renewal. Then there are few who have the commercial real estate property which is substantially of more value and are simply trying to tap into the equities of the real estate so they can use the money for other purposes like tenant improvements, build outs etc. We have worked with many such people and have helped them get better to refinance options.
We are now going to share with you how you can refinance your commercial property, and what are the benefits of doing so. Read on!
First of all, how does refinancing commercial real estate property help?
1) You can lock in on historically low-interest rates for long-term
There are lenders who offer long-term loans with fixed interest rates. Most of the times, you will have the choice of locking the rate at application along with a good faith refundable deposit. Rather than financing the property every now and then in market conditions that are unpredictable, you could make use of the current environment of low rate interest and fix upon a low-interest rate for your loan for ten years or even more.
2) You will have improved cash flow
This is one of the major reasons business owners look at refinancing their commercial real estate property. By making the most out of the present interest rates in the environment, you can successfully be able to decrease your annual debt service which will only result in extra cash flow. Besides, you will also have the ability to reload amortization for up to thirty years.
3) Borrowing the prepayment fee
Many borrowers feel hesitant when it comes to refinancing their commercial property before maturity since there is a prepayment premium that is tracked with a payoff of the commercial loan. In the low rate of interest environment, if the loan you have is going to mature in two to three years, it could be better if you consider paying the existing loan early. If you refinance the property at a more helpful rate of interest, you would be able to absorb all costs of the penalty in a very short span of time, while also lowering the P&I payment.
4) Consolidating debt
Most of the times, the borrowers may own many commercial properties. If you are one of them, you can consider refinancing and consolidating many mortgages under one loan, and you will be able to negate some risks of some properties since you will have the strength of rest of the properties in your portfolio. While doing so, you can also benefit from other favorable terms along with amortization, pricing, and decrease in fees.
5) Disbursement of equity
Besides paying off all existing debts, your commercial property could also be refined in order to recoup the equity. Such cash-outs could be of significant size and could free your working capital so you can use it on other ventures.
6) You can get out of adjustable-rate loans
For various reasons, the adjustable interest rate mortgages fluctuate. If you refinance your property to a fixed rate of interest, you can hugely decrease the volatility in your portfolio. By locking in the current low rate of interests, you can guarantee the avoiding of unprecedented fluctuations in the interest rates in coming future.
7) You can avoid balloon
One type of mortgage is where you may have smaller payments on a monthly basis during the term you’ve fixed, and at the end of the cycle, the rest of the amount may be due, which could leave your business to make a massive payment. Instead of getting fixed making this kind of payments, you can refinance your mortgage long before such balloon payments can become due.
8) You can have longer terms
If you extend the mortgage terms, you will be able to decrease your mortgage payments that you make on a monthly basis hugely. Extending the term from three years to twenty-five years can largely decrease your monthly payments, thereby relieving you of the strain on the cash flow.
What are the refinancing options you have?
Bank commercial mortgages
A traditional bank mortgage could usually be the suitable form of refinancing commercial property for owners who are looking at reducing their mortgage monthly payments or to have a healthier facility overall. Lenders from bank offer commercial loans with excellent rates and also long terms, which could go up to thirty years.
SBA (Small Business Administration)) mortgage refinancing
Though the commercial property is secured by a loan, the enhancement program of SBA decreases the risk of the commercial lender by covering a huge portion of the amount of the loan if the borrower defaults after obtaining the SBA refinancing loan. This is the reason why many lenders use SBA enhancement program for refinancing.
Private Lenders
Private loans are provided by individuals or private investment groups. As the private lenders are not bound by a lot of restrictions like a conventional lender, they can offer aggressive and creative finance solutions. Private Capital Investors offers expertise in this particular arena, we have experts who can accommodate your needs for creative refinancing solutions, be it bridge loans or any of the other types of financing options.
What is the Refinance process in a nutshell?
Refinancing commercial real estate property falls in the same line as refinancing any loan for that matter. Be able to show income and have high credit scores. But just because you had a smooth run during the mortgage process doesn’t mean it is going to be an easy catch again, especially if the figures of your business had changed. Refinancing of a commercial mortgage could need much more documentation levels and also personal guarantees for securing a loan.
Here are a few steps you need to follow;
- Prepare proper documentation
At a bare minimum, you must at least be able to present the financial picture of your business. It means that you must show tax returns of two years minimum, cash flow records like profit & loss statement, bank records as well as financial statements. You may also be asked two produce financials of one-year minimum. The lender may also require a clear business plan and the summary of execution which talks about the growth direction and offers biographies which could demonstrate your ability to lead the company.
Besides, the lender may also require a personal guarantee on loans if the profits are marginal. It only means that one or more than one primary business owners use their personal assets like collaterals to secure the loan.
- Understand your costs
You must know that commercial lending could be more expensive when compared to consumer lending. Even the costs of appraisal may range anywhere from $ 2000-$5000 or even more for bigger properties. You won’t be securing loans if the appraisal has not got to show enough equity in your commercial property. You will have inspections, fees for origination and closing costs related to the loans. Besides, the manpower you may spend on preparing and dealing with the process of refinancing, the time, could also be money which you spend on something apart from the business.
Do your homework. See if it’s really cost effective for you to refinance. It could take 2-3 years of savings on your new mortgage to offset the costs you incur from origination fees and other costs. As a business professional, consider if it’s worth it.
- Applying for the commercial mortgage
With all the homework and paperwork ready, you can now apply for the mortgage. Do not refrain from looking out for best of the rates. Let banks contest with your existing loan rates, and negotiate fees. The lenders will then review the financial package, seek extra information if they require, and conduct a credit check on your business and personal guarantors if any. Your credit will be reviewed by the underwriter, along with your income histories and debts. Just like in the case of a loan, the underwriter will have to see a positive score in your credit history, in time full payment of your bills, sufficient savings, cash flow, assets to cover your loan payments.
Understanding the Pros and Cons of Refinancing a Commercial Property
Advantages: You can reduce your monthly payment.
Customers generally refinance to reduce their monthly payments. You can do this by negotiating a lower mortgage rate. It should be less than the rate on your existing loan.
The financing terms may be better.
If you own commercial real estate, you may also benefit. You can do so by adjusting the loan’s payback term or kind if you have an adjustable-rate loan. For instance, you could refinance into a fixed-rate loan. Doing so would ensure that, if rates increase, your payments are more steady.
You can escape a large balloon payment.
For commercial loans, balloon payments are a possibility. They are huge, lump-sum payments that cover the loan’s balance. This is because, compared to traditional mortgages, commercial loans have shorter payback terms.
These terms are usually five to ten years. They are amortized over shorter periods. This leads to a large balance due when the loan matures. You can only make such a small payment at a time. You can do this by refinancing commercial real estate.
With a cash-out refinance, you can take out a tax-free loan.
When you refinance a commercial property loan with a cash-out option, you borrow more than you owe. You get the extra money in cash. Many real estate investors use the money to buy new properties. They also use it to renovate their current ones.
Cons
There are significant up-front fees.
Closing expenses are linked to refinancing a business property. They were when you first got your loan. Verify that the savings from your new loan will exceed the amount of any upfront fees.
Not all commercial real estate loan types by Private Capital Investors may be eligible for refinancing.
Many things move. Complicated rules govern which commercial real estate loans can be refinanced. Check with your lender to see any restrictions on your loan.
Your previous lender might impose a prepayment penalty on you.
Some lenders, including the U.S. Small Business Administration (SBA), charge a prepayment penalty if you pay off your loan early. This penalty might increase your expenses.
The Conclusion
There are plenty of choices for a real estate owner to refinance his/her commercial property. As a matter of fact, there are lenders available who provide commercial property mortgages. Each such commercial lenders provide different terms, rates, structures for their facilities of loans. Since there are too many options and loan lenders out there, the entire process of getting the right fit for the business you own could be tricky and a tiring process. If you require any aid with refinancing your commercial real estate property, connect to one of our experts in finance, and we’d definitely make your process hassle free!
