When refinancing a commercial property makes sense
Owners refinance commercial real estate for four main reasons:
- The loan is maturing. A balloon is coming due and has to be paid off. This is the most common reason, and it isn’t optional.
- Rates have dropped, or the property now qualifies for a better loan type, for example moving from a bridge loan to permanent financing after lease-up.
- Cash out. The property has gained value or the loan has been paid down, and you want to pull equity for another purchase or improvements. The cash-out refinance calculator is built for that.
- Restructuring: removing a partner, getting out of a recourse loan, or replacing a floating rate with a fixed one.
A refinance that lowers the payment is worth doing when the savings repay the closing costs well before you expect to sell or refinance again. The breakeven line in the calculator shows exactly that.
Worked example
An owner has $1,800,000 left on a loan at 8.5% with 20 years remaining. The payment is $15,620.82 a month. Refinancing the same balance at 7.0% on a new 25-year amortization drops the payment to $12,722.03, saving $2,898.79 a month. At 2% closing costs ($36,000), the refinance pays for itself in about 13 months.
Part of that saving comes from stretching the amortization back to 25 years, not just the lower rate. That is normal on a commercial refinance, but it means principal is paid down more slowly.
How lenders size a refinance
The new lender doesn’t care what you owe. It sizes the loan on the property as it is today: the lower of the loan-to-value limit (usually 65–75% on a refinance) and the amount the net operating income supports at its minimum DSCR, often 1.25x. If the current balance is higher than that number, you need to bring cash to closing, find a lender with looser limits, or use a bridge loan while you raise income. The loan amount calculator shows which limit is binding.
Refinance costs and prepayment penalties
Expect 1.5–3% of the loan in total costs: origination points, appraisal, environmental and property condition reports, title, legal fees and lender charges. Before anything else, read the prepayment clause on the existing loan. Bank loans often use a step-down (for example 3-2-1%). CMBS and life-company loans can carry yield maintenance or defeasance, which can make an early refinance very expensive when rates have fallen. Near maturity, most loans open up with no penalty for the last 3–6 months.
Timeline
A commercial refinance typically takes 45–90 days from application to closing. If the loan matures in less than six months, start now.