Refinancing can not only ease the financial burden on your business, but it can also open up a whole new world of possibilities—if you’re a savvy investor. While the banks want you to take their cut-and-dry deal (if they can even offer you one,) it’s in your best interest to be prepared by examining all of the additional elements in the refinance equation.
After covering the 4 Cardinal Components of Refinancing, be sure to examine which special considerations would most benefit or hurt your investment, including:
• The detrimental “balloon payment”
• Your loan-to-value (LTV and Cash-out options)
• Whether or not you have stabilized property benefits
• The opportunity costs of your reinvestment Your eligibility for special programs
Your eligibility for special programs
Remember, when it comes to refinancing, taking all these into account is the best formula for making a good business decision.
Balloon Payments
Balloon payments are tricky. Some balloon payments may be renewed at a pre-set cost, but beware!
Other balloon payments are due in full when their terms are “called”. Sure, starting off with a lower rate may seem like the most beneficial situation for a new business—but consider the prospect of being forced to refinance 5, 7 or 10 years down the road when you are uncertain of the financial climate. Make sure you’re aware of 1) what type of balloon payment you’re considering, and 2) whether your business will start seeing an ROI in enough time to buffer the balloon payment.
LTV and Cash-Out
If the appraised value of your property has risen since your initial loan, then you may be eligible to refinance with cash-out options. While you may not want to use the maximum leverage, a refinance is a great time to consider liberating cash for another investment, such as adding new equipment to your business, or giving your building the necessary updates it needs. Our programs go up to 80% Loan to Value (LTV).
Stabilized Property Benefits
To be considered stabilized, a commercial property should 1) be leased at 90% capacity, and 2) have at least a full year’s operating history. With a stabilized property, you can choose long-term, fixed rate loan options. The longer the “fixed period” of the loan, the more likely a lender will add small rate premiums to your base interest rate in exchange for risk of interest rates moving up. Unlike the banks, we have funds available for 5-year, 10-year, and even 15-year fixed rates (fully amortizing) CRE refinancing loans.
Our 5-year fixed-rates beat out most of the attractively low adjustable rates. (FYI: With us, fixed rates of 7- or 10-years are only marginally higher than a 5-year fixed rate.)
Special Programs
The Wall Street Journal’s Prime Rate can be beat. For larger properties over $5MM, our 10-year rate with
Commercial Mortgage-Backed Security (CMBS or “conduit”) private equity fund money is the lowest-cost
refinancing option available. We have lenders that will even offer 15-year fixed rates, fully amortizing
loans if your property can support the payment with cash flow. With our SBA 504 loans, we can even
offer these low fixed rates for terms up to 22.5 years.
Opportunity Costs
Evaluating your opportunity cost, as it is referred to in business and commercial real estate, is an examination of whether this property is worth keeping for a longer term at the cost of the “opportunity” to place these funds elsewhere for a better return. When evaluating your opportunity cost, answer these questions:
• What is the 5, 10 and 20-year outlook for this property and the comparable area? Are rents stable and demand rising?
• Is the ROI on the property comparable or better than other similar properties in the area?
• Is it time for renovations or improvements, and would they prove to net a greater return to you?
If your answer was “yes” to renovations or improvements needed, now is also the time to consider this. Adding the cost of improvements or renovations while refinancing is a better way to keep your overall loan costs down and to improve the future value of the property. Also, considering the long-term trends in the property area will help you decide the possible terms of your refinance.
If you find that your opportunity cost is higher than the cost of your refinance, then maybe it’s time to consider selling your commercial real estate.
In Conclusion
Big banks are looking for uncomplicated, easy loans. They simply don’t want to, or are unmotivated to
take the risk on your behalf. Being informed of all of the extended elements of the refinance decision will
help you be better prepared to seek out the perfect loan for you.
Unlike the traditional corner banks, our lenders are not strapped to the strict guidelines and restrictions.
When advising you on your refinancing options, our team is dedicated to pursuing a refinance that
addresses all of the elements of your investment’s current and future needs.
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