Commercial real estate is an expensive investment, and it is not a joke to grow your portfolio quickly! You might come up with up-front capital to buy the property and be able to afford the monthly mortgage payments.
Experienced commercial real estate investors understand the advantages of refinancing and the value of cash flow that allow them to spend less money. They make use of finite opportunities to gain streams of passive income that ultimately makes them financially free. Wealth is built over time, and wise investors maximize their returns by using refinancing available to them.
Once you start earning from commercial real estate, you probably want to increase the property value. Doing this consistently over time will result in good cash flow and increases your net worth. Refinancing commercial real estate also has significant tax benefits.
Are you considering refinancing your commercial real estate? You might need cash to free up some funds for repairs and renovations, or other reasons. Here are a few secrets to refinancing that help you find if refinancing is the right choice.
What Is Commercial Loan Refinancing?
Refinancing helps replace the original loan with a new loan. For example, if you are about to pay a balloon payment, you can refinance the property to avoid a high premium.
The new loan will pay off the old loan, and it will also save you from making the balloon payment.
Commercial refinancing is different from residential properties. Commercial properties are intended to generate income, and that ‘revenue’ defines the property’s value. The revenue favors the loan terms offered by the lenders.
Commercial owners place debt on properties at the time of purchase, and wise owners consider refinancing down the line. Unlike residential loans, commercial loans vary in length. Short term loans are issues for three years or less. They are mostly offered for construction or to improve the infrastructure of the property.
Long term commercial loans vary in length. They generally work for 5 – 20 years. Commercial loans also require a balloon payment at the closure. When the loan matures, you would have paid only a fraction of the principal, and the last payment is typically very high as the rest of the loan amount becomes due immediately.
Refinancing helps replace the original loan with a new loan. For example, if you are about to pay a balloon payment, you can refinance the property to avoid a high premium. The new loan will pay off the old loan, and it will also save you from making the balloon payment.
What Are the Types of Commercial Refinance Loans?
You need to carefully consider the different types of loans available to take benefits of refinancing.
Traditional Refinancing Loan
It is the most common type of loan that is used to refinance a lower rate mortgage. The terms of the traditional loans are almost similar to the original mortgage but at a lower interest rate.
Commercial Cash-Out Refinancing Loan
It allows the borrower to tap the equity of the property to take cash out. The owner should have significant equity to be able to take cash out of their refinance loan. Many banks and financial institutes require the real estate owner to have 30% equity in the property after the cash is taken out. The commercial cash-out refinancing loan is used when owners take a loan against their equity and use the cash-out option to improve property improvement.
The interest rate for a cash-out loan will be higher than the original loan. You can opt for this only when there is an immediate need for cash.
Commercial Mortgage Bridge Loans
It is a short-term loan to bridge the gap to secure a long-term loan on the property. Bridge loans are available for two years or less. They are often structured as an interest-only loan with a high balloon payment. Borrowers opt for bridge loans to renovate a property when they are not eligible for a traditional mortgage or long-term financing.
Who Are Commercial Refinance Lenders?
Banks? Of course, yes! But banks aren’t the only solution for refinancing commercial real estate. There are many types of lenders offering refinancing loans at different interest rates. If you are looking around for the best refinance lenders, here are a few options to consider.
- Traditional Banking Institution – A straight forward way to refinance commercial real estate. All banks offer a similar loan term.
- Hard Money Lenders – they are private lenders who specialize in various loan sizes. Borrowers who cannot get loans through traditional commercial banks can approach a private lender.
- SBA Loans – The U.S Small Business Administration offers loans tailored for a variety of business owners and their commercial real estate. SBA loan offers low fixed rates, and the terms are fully amortized. The commercial bank will first provide a mortgage loan to the SBA, which provides a second mortgage up to 90% through the local community. The borrower should contribute 10% as a down payment.
- Community Banks – They are the traditional banks located within specific demography. They provide loans to commercial real estate within their geography.
- CMBS Loans – Conduit lenders offer them. Commercial mortgage-backed securities (CBMS) loans have little to no cash-out restriction. They are very popular among the borrowers as they can get a 75% loan on equity.
- Crowdfunded Loans – It is becoming popular in recent times, and many crowdfunding companies release refinancing funds to commercial real estate properties.
Why Refinancing Commercial Property Is a Good Option?
Commercial owners may want to refinance their property for many reasons. It can be due to strained mortgage debt, reduce the debt, increase the mortgage term, have a bridge loan, improve cash flow, or other reasons. Few owners look for refinancing to appreciate the property value and use the finance for other investment and development reasons.
Reasons to Choose Commercial Loan Refinancing
Low Long-Term Interest Rate
For those who are looking for a low-interest rate, refinancing is the best option. In most cases, you can avoid the fluctuation interest rates and choose a guaranteed low-interest rate for ten years or more.
Increase Cash Flow
The primary reason for refinancing commercial real estate is to improve cash flow. With the advantage of low-interest rates, borrowers can reduce their annual debt and, in turn, improve their cash flow.
Prepayment Fees
Many commercial real estate owners hesitate to opt for refinancing due to the prepayment fees with a commercial loan payoff. With the low interest refinancing loan, borrowers can easily close the existing loan quickly at a lower rate than the original.
Consolidated Debt
Real estate owners with multiple properties can opt for refinancing to consolidate various loans on different properties. They can finally maintain one loan and take advantage of low interest and reduction in fees or penalties.
Equity Disbursement
Refinancing loans can be the best way to pay off existing debt, and it can also be used for equity. This can free up working capital for other projects.
Get Rid of Adjustable Loan Rates
The interest rate on loans can fluctuate due to many reasons. With the help of refinances, you can acquire a fixed rate (low-interest rate). It can avoid an unpredictable increase in interest rates in the future.
Reduce the Length of the Mortgage Term
Property owners refinance to shorten their mortgage terms. For example, if you have a mortgage for 30-years and want to shorten the term to 15-years, you can consider refinancing to avoid long term commitment.
Commercial Refinance Loan Term
Commercial loan rates are practically higher than residential loans. The interest rate may be a bit lower only if the owner occupies the commercial property as a family rental. Several lenders offer different interest. Before you opt for one, you need to understand the various options available and choose the best terms.
You may also approach a commercial real estate refinancing broker to help you deal with refinances for your profit.
It is important to browse through the option and choose the refinance at the lowest interest rate. You need to remember there is an additional cost for refinancing, such as processing fees and more. It is a good idea to choose a lender who has the maximum cap on their additional fee.
What are the Requirements to Refinance Commercial Property
Once you’ve picked the type of business loan you need. It’s critical to understand the refinance rules.
Credit rating
A personal FICO credit score, as assessed by Private Capital Investors, is distinct from a company credit score. Lenders typically prefer to see a high personal credit score. However, the SBA usually requires a FICO Small Business Scoring Service (SBSS) score of at least 155 (out of 300) to approve an applicant for an SBA 7(a) loan. It’s important to note that lender requirements for nongovernment loans vary in terms of credit score.
Operating profit (NOI) net
Net operating income (NOI) is a property’s gross income minus its operational costs, which do not include debts or taxes. The higher the NOI, the greater your chances of getting approved for a refinance business loan. Lenders have different criteria for NOIs for various loan programs, which are influenced by the business type and property size.
Debt service coverage ratio (DSCR)
This ratio gauges a company’s ability to pay down debt by analyzing its cash flow. A ratio above one in this calculation means the business is making enough money to pay its loans. Lenders typically choose the range of 1.2 to 1.5 as a benchmark. Lenders often want to see a few years of consistent operation to show sustainability.
