Understanding Your Commercial Mortgage Refinancing Options
Refinancing commercial real estate can help investors achieve a better interest rate, a longer term, or a longer amortization, increasing their monthly cash flow. In some cases, investors may also wish to convert a fixed-rate loan to a floating-rate loan to take advantage of falling interest rates. In addition, borrowers may want to get cash out refinances in order to free up capital to make renovations and improvements, or to invest in other properties.
Commercial real estate borrowers also may also wish 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, construction 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.
What Are Your Commercial Real Estate Refinancing Options in 2019?
In this article, we’ll review each of the common refinancing options for commercial real estate loans, including:
Bank Loans: Typically offer 5-year, full-recourse loan terms with 25-year amortizations. LTVs up to 75%, commercial equity loans and commercial equity lines of credit allow for cash out.
Life Company Loans: Generally offer 15-25-year fully amortizing terms, with LTVs between 55-70%. Difficult to qualify, but interest rates are extremely low. Loans are generally non-recourse.
CMBS Loans: Conduit lenders offer 5, 7, or 10-year non-recourse loan terms with 25-30-year amortizations and LTVs up to 75%.
HUD/FHA Multifamily Financing: HUD 223(f) loans offer non-recourse, 35-year fixed and fully amortizing loans for eligible multifamily properties. Leverage allowed up to 83.3% LTV. Time intensive application process, but very low interest rates.
Fannie Mae and Freddie Mac: 5-30-year fixed and variable rate loan terms with LTVs up to 80%. Most loans are non-recourse.
SBA 504 Loans: For owner-occupied commercial real estate only, the SBA 504 program offers 20-year, fixed-rate loan terms with very low interest rates. Loans are full recourse and business borrowers must meet the SBA’s size and industry requirements.
Commercial Refinancing with Bank Loans and Life Company Loans
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. However, banks also typically offer commercial equity loans and commercial equity lines of credit for eligible customers, which allows them to cash out some of the equity in their property.
In contrast, refinancing a commercial mortgage 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 companies typically offer 25-year, fully-amortizing loans with highly competitive interest rates, with LTVs between 50 and 70%. The vast majority of loans are non-recourse, but this can vary between lenders.
Refinancing Commercial Real Estate With CMBS Loans
Since CMBS loans typically have 5-10-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 financing is one of the few commercial refinancing options that offer 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 Multifamily Properties With HUD/FHA Multifamily Loans
For borrowers who qualify, the HUD 223(f) loan is one of the most desirable ways to refinance a multifamily property. The HUD 223(f) program offers 35-year, non-recourse, fully amortizing loan terms, LTVs up to 85% for market-rate properties and up to 90% for subsidized affordable properties, with DSCRs as low as 1.20x for market-rate properties, and as low as 1.11x for subsidized affordable properties. While purely commercial properties are not eligible, up to 20% of the net rentable space or 20% of the effective gross income may be derived from commercial space.
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, and you want to extend the loan term or take advantage of falling interest rates, you can refinance it using the HUD 223(a(7) program. Unlike other HUD multifamily loan programs, the HUD 223(a)(7) loan has relatively simple application process and only requires one third-party report.
Multifamily Refinancing With Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac have a wide variety of options when it comes to refinancing multifamily properties. Freddie Mac, for example, offers fixed-rate loans with between 5-7 year terms (for securitized loans), and up to 30-year terms (for non-securitized loans), with LTVs up to 80%. Similarly, the Fannie Mae DUS loan program also offers 5-30-year loan terms, with fixed-rate, variable-rate, and interest-only options, with LTVs also up to 80%.
Much like HUD/FHA multifamily loans, Fannie and Freddie don’t permit fully commercial properties, but they do allow a certain portion of a property to be leased to commercial tenants, often between 15-25%. However, this varies between individual loan types.
Refinancing Owner-Occupied Commercial Properties with SBA 504 Loans
For borrowers who wish to refinance an owner-occupied commercial property, the SBA 504 loan program can be an excellent option. While the SBA has strict eligibility requirements for borrowers, the 504 loan offers extremely low interest rates, leverage up to 90% LTV, and 20-year fixed-rate loan terms, making it an extremely competitive option in a crowded marketplace. 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. Despite their benefits, borrowers should note that SBA loans are generally full-recourse.