There are many pitfalls that can eliminate or create problems on a commercial mortgage refinance. Whether or not your particular situation will qualify, depends on several factors. Understanding your potential loans strengths and weaknesses will save you time and ensure your best chance of a successful commercial refinance. Below are some basic questions and concepts to keep in mind regarding your commercial mortgage refinance.
Commercial Mortgage Refinancing – Ownership
First, how long have you owned the subject property? Has it been less than 12 months? The lender will use the purchase price plus any documentable improvements you’ve put into the property – not the appraised value. Many borrowers are often surprised by this, and this rule is getting more and more prevalent as the credit crisis continues. It’s often referred to as a seasoning issue.
For example, if you bought the subject property 9 months ago, and put down 20%, you will not have sufficent equity, even if you’re convinced you “stole” the property. The banks will look at your loan request at 80% and most will only consider commercial mortgage refinances at 75% loan to value or less.
Commercial Mortgage Refinance – Value
Related to above, value or more specifically to commercial mortgage refinancing, loan to value is becoming more and more important. Obviously most banks have increased their loan to value standards. For example most banks wouldn’t go beyond 80% -75% on a commercial mortgage refinance a year ago. Now 65% – 75% is the norm. For example if you purchased a property 5 years ago with 85% financing and now you can only get 70% financing on your commercial refinance AND the value has decreased, you’ve got a problem.
In addition, the problem is dynamic in that commercial real estate values are tied to financing. For example the debt coverage ratio (which is a measure of the properties/business cash flow) has a direct impact on the level of debt that can be placed on the property. Most buyers for example (on a purchase) are only interested in putting 20 -25% cash into a property as their down payment. If they have to put more into the deal, just so the property cash flows, many buyers will just come to the conclusion the property is overpriced. So the seller will have to drop the price in order for buyers to be interested and in order to get financing.
If the current owner has a 30 year amortization schedule, and the buyer can only find 20 year financing, there will be a cash flow issue and the only way to overcome this is by 1. The buyer brings in a higher down payment or 2. The seller reduces the price. This sale will be registered with appraisal companies and have an impact on the general commercial real estate values in the properties city.
Commercial Mortgage Refinance, Current terms
What are your current mortgage terms? Are you refinancing because you want a lower rate? Longer amortization and or fixed period? Want to pull cash out? Or do you have a ballooning loan? One of the biggest questions to ask yourself is, “what are my prepayment penalty?” This clause can kill your deal.
Prepayments come in a couple of different forms. Some are fixed or declining but all are tied by a percentage to the existing loan balance for a certain amount of years. For example a 5% flat, 5 year prepayment is common. Another example is a 5% declining. Meaning 5% in the first year, 4% in the second years… down to zero.
Lockouts are another issue. They are a form of prepayment penalties but are normally harsher. For example on a 3 year lock out you would owe the lender 3 years worth of interest if you were to sell/refinance the property. Which often, adds up to hundreds of thousands of dollars or more depending on the loan amount.
Commercial Mortgage Refinancing, Property Charteristic
What type of commercial property are you refinancing? Different building types get of vastly different terms. 75% loan to value on a restaurant refinance will not fund, while a 75% loan top value on an office building will.
If your business occupies some of the space, what percentage? Is it more than 25%? Is it more than 50%? Many lenders will consider it an owner occupied deal if you’re in more than 25%. Virtually all lenders consider it owner occupied if your business occupies more than 51% of the subject building, which will often give you better terms.
Despite the credit crisis commercial mortgage refinancing is still viable. Take your time and work with experienced professional to make sure you get the best terms available.