Benefits of refinancing commercial real estate
Refinance commercial real estate involves using the money from a new loan to pay off existing debt obligations. Owners of office buildings, industrial facilities, or trading floors can take advantage of this procedure.
Benefits of commercial refinancing:
-
Easing the credit burden. Reducing the interest rate on loans allows the minimization of monthly payments.
-
Improvement of loan repayment conditions. Refinance for commercial property is often used to extend a loan's repayment period and change interest rates.
-
Prevention of debt growth. Commercial mortgage refinance helps avoid large payments. This is especially important if the client's income has decreased or expenses have increased.
-
New loan on favorable terms. Having issued a commercial refi loan, you can get money in cash. You can use this money for profitable investments: buying new real estate, significant repairs, and launching promising projects.
Commercial refinancing involves the conclusion of a new loan agreement. A reduced interest rate or an extended agreement term makes it possible to achieve complete or partial repayment of the debt. You can issue it in the organization that gave the loan or in any other financial company.
Refinance commercial property allows you to reduce the overpayment on loan and maintain a positive credit history of the client.
Cons of commercial refinancing
Like any other financial procedure, commercial refinancing has its disadvantages. The main ones among them are:
-
Additional expenses and troubles. To obtain a commercial real estate refinance loan, it is necessary to re-collect documents. Often this requires additional costs. Before agreeing to the procedure, you need to ensure that the benefit from the new loan will be more than the commission fees.
-
Not all types of loans are subject to refinancing. For example, U.S. Small Business Administration (SBA) 504 loans that the US government backs cannot be refinanced. Contact your lender to learn about the current restrictions to your loan program.
-
Penalties for delinquency on long-term loans. Some lenders charge penalties for long-term repayment of loans. The longer you repay the loan, the higher the overpayment will be.
Commercial refinancing will not be helpful if there are less than six months left until the end of debt payments.
Types of loans for refinancing commercial real estate
Commercial real estate owners can take advantage of three main refinancing programs. Let's consider each of them in detail.
Government-backed refinance loans
Government agencies (SBA or USDA) support such loan programs. The SBA refinances loans up to $5.5 million, as does the United States Department of Agriculture (USDA). In this case, the standard refinancing procedure is involved. SBA and USDA agree to refinance part of the debt. But only if the borrower strictly complies with the terms of the loan agreement. If this does not happen, the loan will not be repaid. However, this form of refinancing is very convenient. In this case, borrowers can count on more flexible eligibility requirements.
Owners of commercial real estate can apply for a state loan for refinancing. To do this, they need to provide documents confirming the complete and timely payments on the loan for the last 36 months. Some business entities may be denied refinancing. This can happen if the SBA finds the reason for the referral to be inappropriate. The principal condition for obtaining a USDA loan is that the property must be located in a rural area, and the business owner must be a US citizen or permanent resident.
Conventional commercial refinance loans
It is the most common type of loan today. Banks or mortgage lenders issue standard commercial loans for refinancing. The federal government does not provide this type of refinancing. It has no credit limits and can be secured by collateral. This refinancing differs from the original loan by changing the interest rate and the loan term. All business entities can apply for a commercial refinancing loan. The main thing is to convince the lender that you can pay off all your debts. Owners of branched network holdings and successful companies often choose this form of refinancing.
Commercial cash-out refinance loans
A commercial cash refinancing loan allows you to replace an existing mortgage with a new loan. The borrower receives more cash in cash than he originally needed.
The principle of cash out commercial refinance: the borrower receives approval from the lender, after which the difference between the new and old loan is paid in cash. Usually, these funds can be used at your discretion. But sometimes lenders set the conditions for their intended use. This type of lending is suitable for business entities that have significant financial resources at their disposal.
Criteria for approval of an application for refinancing
Many entrepreneurs are interested in how to get equity out of commercial property? First, you need to study the requirements for potential borrowers. The main ones among them:
-
Credit rating. This indicator differs for business and private borrowers. Lenders give preference to borrowers with the highest possible credit rating. For example, to be approved for commercial refinancing by the SBA, a FICO score must be at least 155 (out of 300). But there may be exceptions. It all depends on the borrower and his credit history.
-
Net operating income (NOI). The higher the gross profit minus the cost of debt repayment, the more likely it is to get approved. Before agreeing to refinance, the lender considers the terms of the loan program, the specifics of the field of activity, the company's cash flow, and the size of the property.
-
Debt service coverage ratio (DSCR). This is an essential tool for assessing the financial stability of the borrower. It shows the amount of money at the borrower's disposal, which can be used to pay off the debt. The reference value of DSCR is 1.2-1.5.
-
Operating history. Before agreeing to refinance for commercial property, lenders assess the business's financial stability. The assessment period may vary depending on the lender.
-
Documentation. The list of documents is different for companies and individuals. Business entities will need the following documents:
-
Tax return.
-
Operating activity reports.
-
Constituent and registration documents.
-
Documents for real estate and land
-
Lease contract.
-
Bank statements for business and personal accounts.
The lender may request additional documents to register commercial real estate refinance cash out.
How much will it cost to refinance commercial real estate?
Before you decide to refinance commercial property, you need to identify the costs that may arise during the procedure. Typical costs incurred in the process of commercial refinancing:
-
Early repayment penalty. The lender sets the amount. You will have to pay a fee if you want to repay the loan before the due date.
-
Guarantee fee - 0.25%-3.75%. The guarantee fee amount depends on the type and amount of the loan.
-
Credit report fee. Before approving an application for refinancing, lenders must assess the borrower's solvency. To do this, they request credit reports from three major credit agencies - Equifax, Experian, and TransUnion. The borrower pays for their preparation and shipping.
-
Application fee. This fee must be paid regardless of whether your application is approved or not. The amount of the fee depends on the lender.
-
Origination fee. This commission allows lenders to offset the cost of refinancing a loan. Its size is not fixed. The origination fee is set as a percentage and depends on the lender.
-
Appraisal fee. The commission is paid to the appraiser, who appraises your property in the refinancing process. A commercial property appraisal will cost more than residential property. The cost depends on the specifics of the object and its location.
If you want to commercial real estate refinance cash out, read the requirements for borrowers and prepare the necessary documents. Before making a decision, evaluate this procedure's pros and cons.
