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Refinancing Commercial Real Estate Loans
Refinancing is a key part of your commercial property investment strategy, particularly when interest rates are fluctuating or if you have a partially amortizing loan.
- Understand Your Commercial Mortgage Refinancing Options
- What Are Your Commercial Real Estate Refinancing Options in 2023?
- Commercial Refinancing with Bank Loans and Life Company Loans
- Refinancing Commercial Real Estate With CMBS Loans
- Refinancing Multifamily Properties With HUD Multifamily Loans
- Multifamily Refinancing With Fannie Mae and Freddie Mac
- Refinancing Owner-Occupied Commercial Properties With an SBA Loan
- Related Questions
- Get Financing
Understand 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 cash flow. 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.
Refinancing may be the logical choice for any borrower with an upcoming balloon payment from a partially amortizing loan. This is the case for CMBS loans, hard money loans, construction loans, and bridge financing, but it can also be common for many types of bank loans and most Fannie Mae or Freddie Mac multifamily loan products.
What Are Your Commercial Real Estate Refinancing Options in 2023?
In this article, we’ll review each of the common refinancing options for commercial real estate loans briefly covered in the table below.
Loan Type | Term | Amortization | LTVs | Recourse |
|---|---|---|---|---|
Bank Loans | 5 years | Up to 25 years | Up to 75% | Full recourse |
Life Company Loans | 15 to 25 years | Fully amortizing | 55% to 70% | Non-recourse |
CMBS Loans | 5, 7, or 10 years | 25 to 30 years | Up to 75% | Non-recourse |
HUD/FHA Multifamily Financing | 35 years | Fully amortizing | Up to 90% | Non-recourse |
Fannie Mae/Freddie Mac | 5 to 30 years | Up to 30 years | Up to 80% | Non-recourse |
SBA Loans | Up to 25 years | Up to 25 years | Up to 90% | Full recourse |
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 a loan, but the fact that they usually offer terms of only five years can be extremely limiting, as constantly refinancing a loan is both 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 five- to 10-year terms, borrowers will need to refinance at some point if they wish to avoid paying a balloon payment at the end of the term. Some borrowers may wish to refinance with yet another CMBS loan, while others may want to refinance with a HUD loan (for multifamily properties), bank financing, or even a life company loan, provided the property and borrower 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 five-year terms with 10- to 20-year amortizations. Finally, CMBS loans are far more focused on a property's financials than a borrower's credit, which makes them easier to get approved.
Refinancing Multifamily Properties With HUD 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 can go up to 85% for market-rate properties and up to 90% for subsidized affordable properties. Further, DSCR requirements can be as low as 1.20x for market-rate properties or 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 a 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 five- and seven-year terms (for securitized loans), and up to 30-year terms (for non-securitized loans). Even better, LTV ratios of up to 80% may be permitted. Similarly, the Fannie Mae DUS loan program also offers 5- to 30-year terms, with fixed-rate, variable-rate, and interest-only options, and LTVs of up to 80%, too.
Much like HUD 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% and 25%. However, this varies depending on the specific loan program.
Refinancing Owner-Occupied Commercial Properties With an SBA Loan
For borrowers who wish to refinance an owner-occupied commercial property, the Small Business Administration backs two different loans that may be ideal: The SBA 7(a) and 504 loans.
SBA 7(a) loans typically cap at $5 million, while SBA 504 loans can go as high as $20 million. 7(a) financing is generally much faster to get, but interest rates are far more competitive with the 504 vehicle — at the cost of additional bureaucracy and a slower timeline.
Both types of loans are generally full recourse, and all borrowers' businesses must meet the SBA's type and size requirements to qualify.
Compare current rates for SBA loans in the table below.
Related Questions
What are the benefits of refinancing a commercial real estate loan?
Refinancing commercial real estate can help investors achieve a better interest rate, a longer term, or a longer amortization, increasing their cash flow. 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.
Refinancing may also be beneficial for borrowers with an upcoming balloon payment from a partially amortizing loan. This is the case for CMBS loans, hard money loans, construction loans, and bridge financing, but it can also be common for many types of bank loans and most Fannie Mae or Freddie Mac multifamily loan products.
Other benefits of refinancing a commercial real estate loan include getting more manageable payments, leveraging an office asset with stable, strong performance, and taking advantage of longer loan terms and amortization schedules, which could translate into lower monthly debt service payments.
What are the risks associated with refinancing a commercial real estate loan?
The risks associated with refinancing a commercial real estate loan include the possibility of a higher monthly payment at the end of the interest-only period when you are required to start paying both principal and interest. Additionally, if the property’s value decreases, you could find yourself underwater on your loan – owing more than the property is worth. Before taking out a loan, be sure to speak with a qualified commercial real estate broker to discuss all of the risks and benefits associated with this type of financing.
What are the different types of commercial real estate loan refinancing options?
The different types of commercial real estate loan refinancing options include bank loans, life company loans, CMBS loans, HUD/FHA multifamily financing, Fannie Mae/Freddie Mac loans, and SBA loans. Each of these loan types have different terms, amortization, loan-to-value ratios, and recourse options.
Loan Type Term Amortization LTVs Recourse Bank Loans 5 years Up to 25 years Up to 75% Full recourse Life Company Loans 15 to 25 years Fully amortizing 55% to 70% Non-recourse CMBS Loans 5, 7, or 10 years 25 to 30 years Up to 75% Non-recourse HUD/FHA Multifamily Financing 35 years Fully amortizing Up to 90% Non-recourse Fannie Mae/Freddie Mac 5 to 30 years Up to 30 years Up to 80% Non-recourse SBA Loans Up to 25 years Up to 25 years Up to 90% Full recourse What are the qualifications for refinancing a commercial real estate loan?
Qualifying for a commercial real estate loan refinancing can vary depending on the lender. Generally, banks require borrowers to have relatively strong financials and offer terms of up to 70% Loan-to-Value (LTV). Life company loans, on the other hand, require borrowers to 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.
What documents are required to refinance a commercial real estate loan?
To refinance a commercial real estate loan, you will need to provide the lender with the following documents:
- Business tax returns
- Financial reports
- Bank statements
- Information on collateral
- A third-party appraisal of the investment property
- Business plan and strategy
You can find more information about the tax benefits of investing in commercial real estate here.
What are the costs associated with refinancing a commercial real estate loan?
When refinancing a commercial real estate loan, there may be some fees associated with the loan. These fees can include origination fees, appraisal fees, and so on. In addition, there may be other associated costs, such as closing costs or annual insurance premiums. Be sure to ask about all of these fees upfront so that there are no surprises later on down the road.
- Understand Your Commercial Mortgage Refinancing Options
- What Are Your Commercial Real Estate Refinancing Options in 2023?
- Commercial Refinancing with Bank Loans and Life Company Loans
- Refinancing Commercial Real Estate With CMBS Loans
- Refinancing Multifamily Properties With HUD Multifamily Loans
- Multifamily Refinancing With Fannie Mae and Freddie Mac
- Refinancing Owner-Occupied Commercial Properties With an SBA Loan
- Related Questions
- Get Financing