CRE Refinancing 101 (or less)

As a Built Environment professional, I couldn't fail to notice that refinancing has been a pretty recurring topic in many discussions with business partners. In order to get up to speed with the ins and outs of commercial real estate refinancing, I have had to do some research.

In this short article, I will delve into the details of commercial real estate refinancing and explore the various benefits and considerations of this financial strategy.

If CRE Ref deals are a frequent guest on your agenda, you can have a critical look at this text and suggest any updates or share your "pearls of wisdom" (tribute to Craig Smith :)).

If CRE Ref is smth new to you, you'll surely find this cheat-sheet helpful (

Landlords grow rich in their sleep without working, risking, or economizing.

John Stuart Mill, political economist

I. Introduction

• Definition of real estate refinancing

Real estate refinancing is the process of taking out a new loan to pay off an existing one, often with the goal of securing a lower interest rate or more favorable terms. This can be done for both commercial and residential properties, and there are several different types of refinancing to consider.

• Purpose of refinancing for commercial and residential properties

There are several reasons why a property owner might choose to refinance their commercial property, including:

1. Lower interest rates: If interest rates have dropped since the original loan was obtained, refinancing can allow the property owner to take advantage of these lower rates and potentially save thousands of dollars over the life of the loan.
2. Longer loan term: Refinancing can allow the property owner to extend the loan term, which can lower their monthly payments. This can be especially helpful if the property owner is experiencing financial difficulty or if they want to use the extra cash flow for other investments.
3. Cash-out refinance: Refinancing can also allow the property owner to tap into the equity they have built up in the property and use it to fund other business ventures or investments.
4. Consolidate debt: Refinancing can also be used to consolidate multiple debts into one loan, which can make it easier to manage payments and potentially lower the overall cost of debt.

Overall, refinancing a commercial property can be a useful tool for property owners to save money, access equity, and improve their financial situation.

Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.

Franklin D. Roosevelt, U.S. president

II. Couple of types of CRE refinancing

• Cash-out refinance

A cash-out refinance is a type of commercial real estate refinancing where the borrower takes out a new loan that is larger than the balance of the existing loan and receives the difference in cash. This type of refinancing can be a good option for property owners who have built up equity in their property and want to use the funds for other purposes, such as investing in new properties, paying off debt, or funding a business expansion.

However, it is important to carefully consider the costs and risks of a cash-out refinance, as it may involve higher interest rates and fees compared to a traditional refinance. It is also essential to ensure that the borrower has the ability to make the higher monthly payments that may be required with a larger loan.

• Rate and term refinance

A rate and term refinance is a type of commercial real estate refinancing that involves obtaining a new loan to pay off the existing loan on a property, with the primary goal of obtaining a lower interest rate or changing the terms of the loan. This type of refinancing can be a good option for property owners who want to lower their monthly payments or improve their financial situation by reducing the overall cost of the loan.

Don’t wait to buy real estate. Buy real estate and wait.

Will Rogers, actor

III. Pros of real estate refinancing

• Lower monthly payments

By securing a lower interest rate or extending the loan period, property owners may be able to reduce the amount they have to pay each month. This can free up cash flow and make it easier for them to manage their expenses. Lower monthly payments can also allow property owners to allocate more of their budget to other business expenses, such as marketing and employee salaries.

Another advantage of commercial real estate refinancing is the ability to tap into the equity of the property. If a property has appreciated in value since it was originally purchased, the owner may be able to refinance the loan and take out cash to use for other business purposes. This can be a useful option for businesses that need capital for expansion or other investments.

In addition, commercial real estate refinancing can provide a way to change the terms of a loan. For example, if a property owner originally took out a variable rate loan and is now concerned about rising interest rates, they may choose to refinance with a fixed rate loan to lock in a lower rate. This can provide peace of mind and help protect against future financial risks.

• Better loan terms

This can include a lower interest rate, which can significantly reduce the total cost of borrowing over the life of the loan. It can also include a longer loan period, which can lower the monthly payments and make it easier to manage the debt. Additionally, refinancing can allow property owners to switch from a variable to a fixed interest rate, which can provide stability and predictability in the long term.

• Avoidance of balloon payment

A balloon payment is a large, one-time payment that is typically required at the end of a loan term. It is often used to lower the monthly payments on a loan by spreading out the payments over a longer period of time. However, this can be risky for businesses as it may be difficult to come up with the large lump sum payment when it is due. By refinancing, businesses can potentially avoid having to make a balloon payment, which can provide financial stability and peace of mind.

• Tax-free borrowing with cash-out refinance

This allows the borrower to take out a larger loan than the current mortgage and receive the difference in cash. This cash can be used for any purpose, such as paying off debt, making improvements to the property, or investing in other business ventures.

It is important to note that there may still be costs associated with a cash-out refinance, such as closing costs, appraisal fees, and origination fees. It is important to carefully consider these costs and compare them to the potential benefits of the refinance before making a decision.

• Ability to tap into the equity

Equity is the portion of the property that the owner owns outright, as opposed to the portion that is financed through a loan.

• Consolidation of multiple loans

This can be especially helpful for businesses that have taken out multiple loans to finance different aspects of their operations or to expand their property portfolio. By consolidating these loans into a single mortgage, businesses can simplify their financial situation, streamline their loan payments, and potentially save money on interest.

Having multiple loans can be a burden for businesses, as it requires them to keep track of multiple payments' due dates and interest rates. It can also be challenging to budget for these expenses, as the payments may vary from month to month. Consolidating these loans into a single mortgage can provide businesses with a more predictable and stable financial situation.

In addition, consolidating multiple loans can save businesses money on interest. By refinancing their loans into a new mortgage with a lower interest rate, businesses can reduce the amount of money they pay in interest over the life of the loan. This can free up additional cash flow that can be used to invest in the business or to pay off other debts.

“Be fearful when others are greedy, and greedy when others are fearful.”

David Greene,?Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple

IV. Cons of real estate refinancing

• Closing costs

One of the main disadvantages of real estate refinancing is the closing costs associated with the process. These costs can include fees for appraisal, credit report, title search, title insurance, and other miscellaneous expenses. These fees can add up, particularly if you are refinancing a large loan. Additionally, some lenders may require you to pay points, which are upfront fees that are a percentage of the loan amount, in order to secure a lower interest rate. All these costs can be substantial and can eat into the potential savings you might realize through refinancing. It's essential to carefully consider the costs of refinancing and compare them to the potential benefits to determine whether it is a good decision for you.

• Extension of the loan repayment period

When you refinance a property, you are essentially taking out a new loan to pay off the old one. This means that you will have a new set of loan terms, including a new repayment period.

If you choose to extend the repayment period as part of your refinance, it can have a few negative consequences. First, it will likely result in a higher overall cost of the loan, as you will be paying interest on the loan for a longer period of time. This can make it more difficult to pay off the loan in the long run, and could potentially put a strain on your finances.

Additionally, extending the repayment period may also lead to a higher monthly payment. While the payment may be lower than your current payment, it will be spread out over a longer period of time, resulting in a higher overall cost. This could make it more difficult for you to budget and plan for your monthly expenses.

Finally, extending the repayment period also means that you will be tied to the property for a longer period of time. If you are planning to sell the property in the near future, a longer repayment period could make it more difficult to do so, as you will still have a significant financial obligation on the property.

• Potential for higher interest rates

When you refinance your property, you may be required to pay a higher interest rate on your mortgage loan than you were previously paying. This can increase your monthly mortgage payments and make it more difficult to afford your mortgage payments.

Additionally, suppose you have a fixed-rate mortgage and you refinance to a variable-rate mortgage. In that case, you may end up paying a higher interest rate if market rates increase over time. This can also increase your monthly mortgage payments and make it more difficult to afford your mortgage.

Furthermore, if you have a low-interest rate loan and refinance to a higher interest rate, you may end up paying more in interest over the life of the loan. This can significantly increase the overall cost of your mortgage and make it more difficult for you to pay off your loan.

• Loss of existing loan terms or perks

For example, suppose you currently have an adjustable-rate mortgage (ARM) and you refinance to a fixed-rate mortgage. In that case, you may lose the ability to benefit from future interest rate decreases. Similarly, if you have a loan with a lender that offers additional perks or rewards for paying on time, such as cashback or points programs, you may lose those benefits when you refinance with a different lender.

Additionally, if you have a loan with prepayment penalties, you may have to pay a fee to break the loan early in order to refinance. This can be a high cost that may outweigh the potential benefits of refinancing.

V. How to prepare for CRE refinancing

• Research current market rates

Before deciding to refinance a commercial real estate property, it is important to research current market rates to ensure that you are getting the best deal possible. This may involve comparing rates from multiple lenders or using online resources to get an idea of the current rate climate. By doing your homework and understanding the current market rates, you can make an informed decision about whether refinancing is a good option for you and your business.

• Consider the long-term financial impact

Refinancing a commercial real estate property can have significant financial implications, both in the short term and the long term. It is important to consider the long-term impact of refinancing before making a decision. This may involve looking at the total cost of the loan, including closing costs and fees, as well as the potential savings on interest over the life of the loan. By carefully considering the long-term financial impact of refinancing, you can ensure that it is the right decision for your business.

• Gather necessary documents and information

In order to apply for commercial real estate refinancing, you will need to provide a variety of documents and information to the lender. This may include financial statements, tax returns, and other financial documents, as well as information about the property itself. It is important to gather all necessary documents and information ahead of time to ensure a smooth and efficient refinancing process.

• Determine the most suitable type of refinance for your situation

There are various types of commercial real estate refinancing available, some of which are mentioned here, and it is important to determine which type is most suitable for your situation. This may involve choosing between a cash-out refinance, which allows you to tap into the equity of your property, or a rate-and-term refinance, which simply adjusts the terms of your existing loan.

Final Note:

In conclusion, commercial real estate refinancing can be a valuable tool for businesses looking to improve their financial situation or make changes to their mortgage.

However, it is important to carefully consider the costs and benefits of refinancing before making a decision, as it can involve closing costs and other fees. By doing thorough research, consulting with a financial professional or lender, and determining the most suitable type of refinancing for your situation, businesses can make informed decisions about whether refinancing is the right choice for them.