Commercial Loan Refinance

When is the optimal time to perform a commercial loan refinance?  Many factors such as market interest rates, prepayment penalties, existing loan terms and the overall goals of the borrower come into play.  There are no set answers, but below are some real world thoughts on how you might analyze your own commercial loan refinance.

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(If you are working on a transaction now, and want specific answers, please fill out our commercial loan application.)

1. Affect their monthly cash flow.
2. What the closing costs will be and how these costs will affect their equity.
3. What the out of pockets costs will be.
4. How long will it take for the monthly savings of the new loan to "pay back" the owners closing costs.
5. What is the viability of really closing. 

Principal pay down is obviously another important component.  However, for most owners, especially those with highly leveraged properties, cash flow is a more pressing consideration.      

Commercial Refinance

Example 1.  Owner Occupied Office Building

The borrower is 3 years into a 5 year fixed, 20 year amortized loan and is considering refinancing into a 5 year fixed, 30 year amortization loan.  The borrowers primary motivation is a desire to increase cash flow (monthly savings to help businesses overall profitability).  In addition, the borrower is concerned over future rate increases when the existing loan balloon's in 2 years.

Increase in cash flow is $1,835 (savings) per month or $22,028 annual.  Essentially, from a cash flow perspective, the borrower would recoup the costs of the loan in less than one year, despite the rate increase by 75 basis points.  Although the borrower would have to pay for the appraisal and environmental report upfront, they would be “refunded” and rolled into the loan amount if desired.      

In our experience most business owners would be very interested in pursuing this commercial refinance.

Commercial Refinancing 

Example 2.  Investment Property, 10 Unit Retail Center  

This borrower has owned the property for 7 years and has two loans on the subject property.  First loan is a conventional floating rate loan that adjusts annually, amortized over 25 years and the second is seller held.   It is amortized over 20 years and has a fixed 20 year rate.  Neither loan has a balloon provision; however the first loan does have a prepayment penalty of 5% of the remaining loan balance, which is in effect for 3 more years.      

Not an easy decision for the borrower.   The option to go forward would probably rest heavily on the borrower’s opinion of where the future interest rates will be when the prepayment period ends.    

It is interesting to note that the borrower would be able to increase his loan amount to $2,333,964 (cash out proceeds would be approximately $598,000) if he choose to.  This is due to the increase in cash flow from the proposed commercial refinance.  The building Debt Coverage Ratio is at a 1.54 on the proposed loan; the typical minimum Debt Coverage Ratio is 1.2.   If the borrowers intent was to pull cash out of the property to inject into another property (or for any other reason) this would probably be a much easier decision to go forward with the proposed commercial loan refinance.

As far as what we do, we close commercial real estate loans, from $400,000 - $5,000,000, nationwide.  Get real answers on your commercial loan refinance, take a few moments to fill out the Pre Approval form now. 

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