Refinance your commercial property with a securitized loan up to 80%. Most banks go up to 75% LTV and prefer to not do a cash out refinance. Private and Securitized Lenders as well as Life Companies have no problem with cash out refinancing for any reason. They view it as “this is your money, do what you want with it”.
By Terry Painter/Mortgage Banker Member Forbes Real Estate Council
Author of “The Encyclopedia of Commercial Real Estate Advice” Release Spring 2020
What You Need to Know Before Refinancing a Commercial loan
Before you apply for refinancing for your commercial property you need to know exactly
what you want the loan to accomplish and choose the right loan product that can give you
The Largest Bang for the Buck. Here is what you need to know:
1. What is Your Purpose for Refinancing?
- Lowering your interest rate and monthly payments?
- Cash-out ?
- Improving you net cash flow with interest only payments?
- Improving you net cash flow with a longer amortization?
- Doing needed improvements to the property to maintain it?
- Doing improvements to the property so you can raise rents?
- Having a new loan where you can pay the principal down faster?
2. How will Refinancing Affect Your Financial Strength?
- If you are taking cash out, can the property afford larger payments?
- If you are doing a rate and term refinance with no cash out to get a better rate, how long will it take for you to pay the closing costs on you new loan from the savings?
- What are the closing costs, and will they have to come out of your pocket, or can you finance them with the new loan?
- Can you negotiate with the lender to pay lower loan costs for the financing fee, appraisal, and other loan expenses?
- Do you have a pre-payment penalty on your current loan? If so how much is it? If it is a hefty one, do the benefits of getting the new loan justify this expense? Be sure to look at your current mortgage note to verify what you prepayment penalty if any is.
3. Do You Qualify for the Refinance Loan You Want? Ask Your Loan Originator these Questions:
- How much can I borrow based on the properties net operating income (NOI) and your debt service coverage ratio (DSCR)?
- How much can I borrow based on your loan to value?
- What are my minimums for net worth, and liquidity?
- What is the minimum credit score I need to qualify?
- Do you allow cash out for any purpose? If so, how much?
- Based on the location and condition of the property, does the property qualify for your loan program?
- If this is a retail, office or industrial property, does the time remaining on my existing leases qualify? If this is a multifamily or self-storage property, are you okay with month to month tenancy?
One of the best ways to increase your net worth in America is to do a cash out refinance of your commercial property to purchase more commercial real estate. This is truly having your cake and eating it too. Not only do you get to keep the original property, but you get to take some of the equity out to invest in another one. Now both properties are earning income from operations and appreciation. You will also be adding an additional tax shelter, with the new property getting depreciation along with the original property. Increasing your income and paying less tax is a sure recipe for rapid financial growth.
Unfortunately, most lenders do not want to see a borrower realize a large financial gain from refinancing their commercial property with a cash out refinance in a short time after purchasing it. This is the case even when you are rehabbing the property. Lenders prefer that you season the property for an average of 2 - 3 years before doing a maximum cash out refinance. At Apartment Loan Store, we do have some loan programs that are an exception to this rule and allow maximum cash out after one year. Go here for more information on cash out options. Here are some of the most popular commercial real estate refinance programs:
Best Commercial Real Estate Lenders for Refinancing
1. Conventional Bank Lenders:
There are certain situations that a conventional bank is a good choice for commercial real estate refinancing. One such situation is that your property is located in the same area as the local bank. This means that such a bank will be familiar with the area your property sits on, and you may get a better rate than some lender types who represent the region or the nation. Not knowing the area, lenders outside the area might factor in a higher interest rate because of assessing higher risk. Another advantage of a bank if it’s a local bank is that if you want to meet with the lender face to face, you drive a short distance to the bank. Another reason a bank—especially a local bank—could be a good loan source, is if you are very strong financially and have a very strong long term banking relationship with that local bank. In this case you could very well get a super interest rate and terms.
The downside is if you are looking for cash out. Most commercial banks prefer that cash out goes into refurbishing the property. They just do not trust what else you might do with all that cash. They often view your purchasing more property with the cash as being a substantial risk. What if the new property goes belly-up? Commercial bank loans are full doc, and require multiple sources of income. They require tax returns and proof of income along with excellent credit scores.
2. Commercial Mortgage Brokers:
An advantage of refinancing through a commercial mortgage broker is that you will be offered a number of different types of loans to choose from. Many banks for example have a very limited number of choices of types of loans. The benefits of having many choices is that you have a good possibility of getting a very good interest rate and terms simply because out of all the choices there may be one that fits your profile and needs strongly. They will also have many loan programs that are more stated income in nature where you do not have to submit your tax returns. Great for self employed people.
Owners are not cookie cutter, and there is an argument to be made that loans should not be cookie cutter either. Another advantage that commercial mortgage brokers offer that conventional lenders don’t offer is that they do bridge and hard money financing.
3. Fannie Mae and Freddie Mac Multifamily Lenders:
These are securitized apartment building loan programs. They allow cash out for any reason up to 80% LTV for Freddie Mac and 75% for Fannie Mae. Fannie May will go up to 80% LTV on a refinance without cash out. These loans require a net worth equal to the loan amount and do not collect tax returns.
4. SBA mortgage lenders:
The Small Business Administration’s SBA enhancement program for commercial mortgage refinancing allows cash out refinancing up to 90% LTV for businesses that own and occupy commercial real estate. Any cash out has to go into your business or commercial property that your business occupies. Lenders that provide SBA loans include credit unions, large banks, small banks as well as private lenders.
With this type of loan, the SBA lender has a very big advantage and that is reduced loan risk as a result of a large percent of the loan being backed by the Small Business Administration in case there is a default on the loan.
5. Commercial Mortgage Backed Security (CMBS) Lenders:
Another name for a commercial mortgage backed security (CMBS) loan is a conduit loan. A big advantage for this loan type is that their rates are low. Also they can be fixed for 5 or 10 years. These loans allow cash out for any reason up to 75% LTV.
Another really good benefit of getting a conduit loan is that it happens to have the quality of being stated in that you don’t need to submit tax returns.
Also, other things about CMBS loans is that you can have a net worth lower than the loan amount—something most commercial lenders require. Having some cash reserves in savings after closing is a plus. Thus, the commercial mortgage backed security loan gives commercial loan access to some people who would normally not qualify for it.
These loans are bundled together with other loans with the same maturity, and sold as mortgage backed security bonds to investors on Wall Street.
One possible downside of CMBS loans is that they have large legal fees. But, if your CMBS loan is a large loan of $2,000,000 or more the big legal fee is much less of a concern.
For more information about CMBS Loans go here
6. Life Insurance Company Lenders:
Life insurance companies generally keep a range of 5 percent to 20 percent of their capital in commercial realty mortgages. Life insurance loan interest rates are super-low and can be fixed for a great amount of time. You can get loans fixed for 10 years, 15 years, or 25 years. And loans are amortized for 25 or 30 years. Plus, you have the advantage of taking cash out for any reason. The borrower has to be extra strong financially though with a net worth larger than the loan, ownership of more than one commercial property, and cash in the bank after of the loan closes of 20% of the loan or more.
7. Private Fund Lenders:
A private lender is a loan company that has its own funds to lend. It’s not a conventional loan and it’s not a bank. Those who fund these loans are private individuals and private investment groups. A big advantage of private loans is that many borrowers who don’t qualify for conventional financing can qualify for a private loan.
This is because private lenders are not limited by the large number of regulations that restrict conventional lenders. But, it’s important to note that private loan companies take higher risks from having higher risk clients. Thus, their rates are higher and their terms are not as favorable when compared to conventional loans. But they will do a cash out refinance for any reason and make the loan more to the property than the borrower.
Reasons to Refinance
1. Your property has a value that is quite a bit more than your mortgage, and this money is just sitting there. For example, you have a mortgage of $2M, but your property is worth $3.5M. Your kids are going to expensive colleges, your family home needs major remodeling, you desire to travel the world, and you would like to add to your retirement accounts. This extra money sitting in your commercial property will come in handy to take care of these needs.
2. You have a need to refinance to a longer term mortgage. An example would be that you have a bridge loan that is to be converted to a permanent loan.
3. You have a mortgage that has payments that are too large to be able to handle your expenses, and you want to make smaller payments. Here are some examples of what owners do to get lower payments:
- Your current loan is maturing. Be sure to allow 60 – 75 days for refinancing
- You are able to refinance and lower your payments by getting a loan with a lower interest rate because interest rates have dropped.
- You are able to refinance and lower your payments by getting a loan with 5 years of zero percent interest payments.
- You are able to refinance and lower your payments by getting a loan with a higher loan to value. Your new loan to value is 75%. Your previous loan to value was 65%. You can use the cash out for another purpose.
- You have increased your credit score from 600 to 740 since getting your current loan 8 years ago. You have also significantly increased your savings as well as your net worth during that same amount of time. Not only do you have a higher credit score, but you now qualify for the best multifamily loan in the United States – The Fannie Mae loan which has great rate and terms.
In conclusion, it is important to know your purpose for refinancing your commercial property and what type of lender to apply with that will meet that purpose. Because it takes an average of 60 days to close a commercial mortgage, it is essential that you choose the right loan program at the beginning and know that you will qualify.
By Terry Painter/President Apartment Loan Store and Business Loan Store