Refinancing in the world of commercial real estate is a way to improve your investment plan, especially when interest rates are going up and down, or if you’re dealing with a loan that pays back only partially over time.
When you refinance your commercial real estate, you’re aiming to get a better deal on your interest rate, extend the time you have to pay back the loan, or give yourself more time to pay off the loan bit by bit. This can help you have more money left over after expenses. Also, you might decide to refinance and take out some extra money, using the value of the property, to have funds for making the property better or for investing in other properties.
Refinancing is a smart move if you’re facing a big payment at the end of a loan that only pays back part of what you owe. This happens with a few types of loans like CMBS, hard money loans, construction loans, and bridge financing. It’s also common with many kinds of bank loans and most Fannie Mae or Freddie Mac multifamily loan options.
In 2023, there are several options available for refinancing commercial real estate:
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Commercial Refinancing with Bank Loans and Life Company Loans
When it comes to refinancing your commercial real estate mortgage, many people opt for a bank loan. However, it’s important to realize that this might not always be the best choice. Bank loans, while providing some convenience in managing your loan and a bit of flexibility for dealing with repayment challenges, have a clear limitation—they usually only last for five years. This means you’ll have to keep refinancing frequently, which can be costly and time-consuming.
Getting a bank loan usually requires you to have a strong financial situation. But it’s worth noting that the eligibility requirements are not as strict as those for obtaining loans from life insurance companies or the U.S. Department of Housing and Urban Development (HUD) for multifamily real estate projects. Typically, with bank loans, you can borrow up to around 70% of your property’s value, and sometimes even up to 75% if your financial situation aligns well. Additionally, some banks offer loans that allow you to use the equity in your property as collateral.
On the other hand, the idea of refinancing your commercial real estate mortgage through a loan facilitated by a life insurance company is quite appealing.
However, it’s important to understand that this route comes with its own set of challenges in terms of qualification. You’ll need to have a very stable financial foundation, and your property must be a top-notch commercial asset located in a prime metropolitan statistical area. Typically, loans provided by life insurance companies span a 25-year term, with fully amortizing structures and highly competitive interest rates. Loan-to-value ratios usually fall between 50% and 70%. Furthermore, it’s noteworthy that most of these loans operate on a non-recourse basis, although this aspect can differ based on the lender you choose.
Refinancing Commercial Real Estate With CMBS Loans
CMBS loans usually last for about five to ten years. But here’s the thing—when that time’s up, you’ll have a big payment due. This is called a “balloon payment.” To avoid that, you have some choices. One option is to get another CMBS loan. Or, you might consider a different type of loan, like one from the U.S. Department of Housing and Urban Development (HUD) if your property is a multifamily one, a loan from a bank, or even a loan from a life insurance company, if both your property and your financial situation qualify.
What’s cool about CMBS loans is that they’re one of the few options that let you take out extra money when you refinance. This is called “cash out.” This can be super appealing if you want to get some money from the property’s value. Also, CMBS loans usually have longer timeframes for paying back and longer periods for spreading out the loan, compared to bank loans, which often last for five years with 10 to 20 years to pay back. Lastly, CMBS loans care more about how the property is doing financially rather than just looking at your credit history, which can make getting approved easier.
Refinancing Multifamily Properties With HUD Multifamily Loans
Alright, imagine you’re a borrower who’s interested in changing your loan for a multi-unit property. There’s this really great option called the HUD 223(f) loan. It’s like a desirable way to give your loan a makeover. With this loan, you get a long time to pay it back—35 years. Plus, you don’t need to personally guarantee it, and you don’t have to pay it all at once at the end. That’s what “non-recourse” and “fully amortizing” mean. Depending on the type of property you have, they might even let you borrow up to 85% or even 90% of what your place is worth. And they don’t ask for a lot of extra money coming in compared to what you’re paying out.
Just so you know, this special loan isn’t for regular commercial properties. But if your property has some commercial space, it’s okay as long as it’s not more than 20% of the whole place.
Now, let’s say you already have one of these HUD loans, like the 223(f) one, or maybe another type called the 221(d)(4) loan. If you want to keep your loan but make it better, or if you see that interest rates are dropping and you want to catch that, you can use something called the HUD 223(a)(7) program. It’s not as complicated as the other HUD loan programs. You don’t need to do a bunch of paperwork, and you only need one report from an outside expert. It’s a simpler way to make your loan better.
Multifamily Refinancing With Fannie Mae and Freddie Mac
Alright, so let’s talk about Fannie Mae and Freddie Mac. They’re like these big companies that have a bunch of ways to help you change your loan for an apartment building. It’s called “refinancing.”
Imagine you have a loan for your apartment place, and you want to make it better. Freddie Mac has some options for you. They can give you a loan with a fixed interest rate, and you can pick how long you want to pay it back—between 5 and 7 years, or even up to 30 years. And guess what? They might let you borrow up to 80% of what your place is worth.
Just like Freddie Mac, Fannie Mae has their own deal called the DUS loan program. It’s kind of similar. You can pick to pay back the loan in 5, 10, 20, or 30 years. You can also choose if you want a fixed interest rate or one that might change over time. Oh, and you can also just pay the interest for a while. And yes, they might let you borrow up to 80% of your property’s value.
Here’s one thing to remember. Fannie Mae and Freddie Mac loans are mostly for places where people live. They’re not really for completely commercial places. But they’re okay if a small part of the place is being used for shops or offices. Usually, it’s around 15% to 25% of the whole place, but it can be a bit different based on which loan program you’re using.
Refinancing Owner-Occupied Commercial Properties With an SBA Loan
If you’re looking to improve a property you use for business, like a shop or an office, the Small Business Administration (SBA) can help with two types of loans: SBA 7(a) and 504 loans.
The SBA 7(a) loan is usually for amounts up to $5 million. On the other hand, the SBA 504 loan can be bigger, even up to $20 million. The 7(a) loan gets approved more quickly, but the 504 loan offers better interest rates. However, the 504 loan comes with more paperwork and takes longer to process.
Now, here’s something important: with both these loans, you’re usually responsible for paying back the full amount. And, your business has to match certain rules and size limits set by the SBA to qualify for these loans.