Three Steps Real Estate Owners Should Take Before Deciding to Refinance
Commercial real estate owners allocate a significant portion of their time to property management. Whether they carry out the work themselves or rely on the services of a professional, property owners clearly understand that successfully managing aspects like rent collection and building maintenance plays an important role in the long-term success of their investment.
Unfortunately, many real estate owners and investors fail to place a similar level of importance on the management of their mortgage. When it comes time to refinance, a lack of foresight can have a serious impact on the amount of revenue a company can expect to generate in both the near and long term.
Borrowers looking to refinance their commercial property and secure a more attractive loan should take the following three initial steps to effectively “manage” their mortgage and create more of an opportunity to achieve their financial goals.
Step 1: Set Goals
Borrowers refinance their commercial properties for a number of reasons. Many take out a new loan to avoid making the balloon payment that may loom at the conclusion of their current term. Others refinance to take advantage of a more favorable interest rate environment.
Borrowers also have an opportunity to tap into their property’s equity when they refinance. This tactic, commonly referred to as a cash-out refinance, describes a scenario where the borrower takes out their original loan with a new one for a larger loan amount. The remaining balance is cash the borrower can use for a number of business-related purposes.
If an owner finds itself in a position to refinance, the first step must be to establish a clear goal. Only then can the company work to secure a solution that meets the greatest number of its needs.
The first instinct of many borrowers is typically to work toward lowering the monthly interest rate. This is a valid goal, but one that can distract borrowers from other benefits that might have a greater impact on the success of their business.
Consider the restaurant owner. If the owner’s goal is to convert a significant amount of equity into cash so it can purchase new kitchen appliances, it may be best served by partnering with a non-bank lender. In exchange for a slightly higher interest rate, the borrower may be able to take a greater amount of cash out of the existing mortgage and complete the transaction in a shorter amount of time.
In most cases, the lenders that offer the lowest interest rates also set the highest number of requirements and restrictions. Depending on the borrower’s goals, it may make sense to look beyond interest rate alone.
Step 2: Look Inward
Even though commercial loan terms are relatively short in length, they still encompass a great deal of borrower and business activity. It is quite common for investors and business owners to appear far more — or less — creditworthy at the end of the mortgage term than they did when they originally secured the loan.
With that in mind, it behooves commercial property owners approaching a refinance to look inward and determine whether or not they might be eligible for more attractive rates and terms.
If a borrower has increased the property’s cash-flow or worked to improve its credit score, it can feel more confident about partnering with lenders that may have turned it down in the past. On the other hand, a growing number of vacancies or missed monthly payments can quickly limit one’s options.
A little self-analysis can go a long way when identifying the ideal solution within the wide range of lender alternatives. If a borrower transitioning from a bank loan understands that it will likely not be able to refinance with the same institution, maybe non-bank alternatives will offer similar benefits.
Step 3: Make Time
Loan terms often range from five to seven years, which is far shorter than the typical home loan term. It follows then that commercial borrowers must frequently set their sights on refinancing their office, retail or industrial properties. However, the task of identifying and securing a new loan solution can easily fall by the wayside as owners manage day-to-day responsibilities.
The truth is that those that neglect their commercial mortgage for too long ultimately limit the opportunity to improve their financial situation. When pressed for time, a borrower may be forced to settle for the first lender that will approve their request for financing.
So when should borrowers start planning their refinance? The answer depends on the type of loan and the borrower and property in question, but investors and business owners would do well to begin the process roughly one year before their existing loan comes due.
However, it is not sufficient just to set aside time — borrowers should also create a plan to ensure that the time is well spent.
One strategy could be to identify the different types of lenders and loan options in the market today. Even savvy property owners should take this step because the lending environment is always changing — lenders may be more or less willing to finance a particular property type and program requirements may be tightened or loosened depending on the current state of the market.
This kind of analysis takes time, and borrowers hoping to secure a more attractive loan must ensure that time is safely on their side.
Mortgage management may not ever be a business owner or investor’s favorite pastime, but devoting some thought and planning to their commercial mortgage — especially at the beginning of the refinancing process — can help them secure a more attractive loan and brighter financial future.
— By Leslie Smith, managing director of Commercial Direct
Commercial Direct is a division of Silver Hill Funding LLC, a small balance mortgage lender based in Coral Gables, Fla. The direct lender funds loans ranging from $250,000 to $5 million for real estate assets including multifamily, mixed-use, office, retail, light industrial, self-storage, automotive, mobile home parks, daycare centers, restaurants, bars and warehouses.