The Basics of Refinancing Commercial Real Estate Loans
Refinancing commercial real estate can be done for a variety of reasons. In many cases, borrowers get cash out refinances in order to free up capital to make renovations/property improvements, or to invest in other properties. In other situations, borrowers may wish to refinance a commercial property in order to achieve a better interest rate, a longer term, or a longer amortization, which can help them increase monthly cash flow. They may also wish to convert a fixed-rate loan to a floating-rate loan to take advantage of falling interest rates. Commercial real estate borrowers also may need to refinance if their loan is partially amortizing and the term of the loan is up. This is the case for CMBS loans, hard money loans, and bridge financing, but can also be the case for many types of bank loans and most Fannie Mae/Freddie Mac multifamily loan products.
Refinancing with Bank Loans and Life Companies
Refinancing your commercial mortgage with a bank loan is a common solution for many CRE borrowers, but it isn’t always the best option. Bank loans typically provide borrowers decent servicing and can be somewhat flexible if a borrower has trouble repaying their loan, but the fact that they usually offer terms of only 5 years can be somewhat limiting, as constantly refinancing a loan can be expensive and time consuming. Bank financing generally requires borrowers to have relatively strong financials, but qualifying isn’t nearly as difficult as being approved for a life company or HUD multifamily loan. Bank refinancing usually permits up to 70% LTV, with some banks going up to 75% for well-qualified borrowers.
In contrast, refinancing CRE debt with a life company loan can be an extremely lucrative option— but it can be very difficult to get approved. In general, a borrower must have extremely strong financials, and the property must be a class A commercial property in a top MSA. Life company loans typically offer 25-year, fully-amortizing loans with highly competitive interest rates, with LTVs between 50 and 70%.
Refinancing CMBS Loans
Since CMBS loans typically have 10-year terms, borrowers will need to refinance before the loan term is up if they wish to avoid paying the remaining principal of the loan. Some borrowers may wish to refinance with yet another CMBS loan, while others may want to refinance with a HUD/FHA multifamily loan (for multifamily properties), bank financing, or even a life company loan (if the property and borrower can qualify). CMBS loans are one of the few commercial refinancing options that offers cash out, making it highly attractive for borrowers who wish to extract equity from their property. In addition, CMBS financing generally has longer terms and longer amortizations than bank financing, which often has 5-year terms with 10-20 year amortizations. Finally, CMBS loans have lower hurdles when qualifying key principals, meaning that a borrower’s financials will not be as highly scrutinized as they would be when applying for bank financing.
Refinancing with HUD 223(f) Loans
While somewhat difficult to qualify for, HUD 223(f) loans are one of the most desirable ways to refinance a multifamily property. While they’re not available for other kinds of commercial properties, HUD 223(f) offers 35-year, fully amortizing terms, LTVs up to 85% for market-rate properties and up to 90% for subsidized affordable properties, and DSCRs as low as 1.20x for market-rate properties, and as low as 1.11x for subsidized affordable properties. In addition, if you have a HUD 223(f) loan, or another kind of HUD-insured multifamily loan, such as a HUD 221(d)(4) loan, you can refinance it using the HUD 223(a(7) program, which, unlike other HUD multifamily loan programs, has relatively simple application process that does not require time-consuming third-party reports.
Refinancing Owner-Occupied Commercial Properties with SBA 504 Loans
For business borrowers who wish to refinance an owner-occupied commercial property, the SBA 504 loan program can be an incredible option. While the SBA can have strict eligibility requirements for borrowers, the 504 loan offers up to 90% LTV, which is considerably more than most competitors. To qualify, a business must meet the SBA’s business type and size requirements, and the original loan must be from a private lender, not the government.