What is commercial refinancing?
- Refinancing entails finding a new lender (or getting the current lender) to pay off the borrower’s old mortgage balance in exchange for a new mortgage.
- As such, once the borrower refinances, the old loan is paid off, and a new one is put in its place.
- The most common reasons motivating companies to refinance are (1) to save money by obtaining better terms such as a lower interest rate (“rate and term refinance”); or (2) to take equity out of the property in the form of cash to, for example, do renovations (“cash-out refinance”).
- Another reason is the current mortgage term is about to expire with a looming balloon payment on the horizon.
- Yet another reason to refinance is a management buyout, where one business partner agrees to allow the other partners to refinance and put the deed solely in their name.
Success Stories (Commercial Refinancing)
Sample commercial refinancing programs
There are two main types of commercial refinancing (or “refis”):
Rate and term refi:
- In this type of refinancing, the borrower simply trades the current mortgage terms for newer and better terms (such as a lower interest rate, or conversion from an adjustable rate to a fixed rate).
- No actual money is exchanged, except closing costs.
- Unlike the rate and term refi, for a cash-out refi, the borrower not only gets new loan terms, but also is advanced money, effectively taking equity out of the property in the form of cash. Typical business purposes for the cash include making tenant improvements; buying equipment or inventory; making renovations; or purchasing another investment property.
- Lenders typically do not place maximum limits on the cash-out amount, and usually base the amount on performance factors such as the property’s net operating income.
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