Commercial Real Estate Refinancing
Refinancing your commercial mortgage is an attractive option for a number of reasons:
- Your numbers are telling you how much money you could save if you’re approved for a new rate
- You want more attractive loan terms
- You’d like to tap into some of the equity in the property
- Impending balloon payments…
The approval process is similar to most other loans, as long as your business’ finances are still in order, or perhaps better than when you were approved for the original mortgage.
Bring Required Documents
Check with your particular loan provider which documents they require before proceeding. Likely, this will include last year’s business tax returns (preferably the last two years), as well as all financial statements from the last one to two years. Some lenders may ask for your business plan and documents which speak towards the growth projections of the business.
If profits are slim, the loan provider may require a personal guarantee, which can include your home or other assets you set as the collateral (as well as any other company owners).
Additional Costs to Expect
Because the commercial mortgage is based on the value of the property, an appraisal will likely need to be completed, which can be fairly expensive for commercial loans. Banks prefer to see a certain percentage of equity in a property before they will refinance, so find out what they’re looking for before paying for the appraisal.
Don’t forget about other expenses:
- Closing costs
- Possible inspections
- Other fees (eg. origination fees)
Figure out if it will be worth it to refinance. With all the work that will go into this, including the origination fee (a fee charged by the lender on entering into a loan agreement to cover the processing cost, which can be 1%), it may take a few years to start saving money on the new loan. This might be well worth it, but do your numbers to ensure you’re making the right decision for the business over the long term.
One benefit to these expenses is that they’re all tax deductible. Just be aware that you may only write off a portion each year the loan is in effect. For example, if your costs were $10,000 for a 10 year loan, you would claim $1,000 each year for those 10 years.
What a Lender Wants to See
As mentioned above, when the lender is looking over your financial statements, they’re looking to see if your business is a good investment for them, or if it’s going to be too risky. Make sure these numbers are adequate and show that your business can handle the new loan payments:
- Debt ratio (monthly debt payments vs income)
- Cash flow
- Income history
- Bill payment history
- Debt-to-loan ratio of 75-80% (20%+ equity is already in the property)
Take some time to shop around, and negotiate the fees. Or hire a loan broker who can shop around for you and possibly get a better deal utilizing their established connections with a good number of banks.