The Ultimate Guide to Refinancing Commercial Real Estate During An Economic Slowdown

As we approach the post-pandemic world numerous economic uncertainties are emerging. Increased inflation and persistent supply restrictions have led to more obstacles that most entrepreneurs and businesses can handle. Many are still reviewing their future space demands as they come to terms with the new work-from-home hybrid models. Impending real estate debt maturity might even exacerbate this situation.

Not only that, but also the Federal Reserve is increasing interest rates for the first time in almost a decade. This makes it harder for you to finance your next project.

However, refinancing your property may be the only way to survive and build equity in current market conditions. With the future still unclear, more cash from a loan refinancing might provide additional security for your business.

Related: How does raising inflation affect multi-family investments?

How to Refinance Commercial Property

Interest rates would undoubtedly rise due to the Fed’s decision to curb inflation, which might be good news for new buyers, but current commercial owners may have a more difficult time refinancing. Some of the major reasons to consider refinancing include the constant growth in treasury rates, the popularity of cash-out refinances, and the chance to boost monthly cash flow due to debt restructuring. 

Government Backed Loans

One of the best ways to refinance commercial property is through government backed loans like SBA loans. An SBA 504 loan will allow you to refinance up to $5 million dollars. 

Traditional Bank Commercial Loans

This is the most frequent loan used to refinance a mortgage with a reduced interest rate. The terms of the conventional loans are almost identical to those of the original mortgage, but the interest rate is lower. 

Commercial Cash-Out Refinance

Refinancing allows the borrower to withdraw cash from the property’s equity. To be able to withdraw funds from a refinancing loan though, the owner must have substantial equity. Many banks and financial institutions demand the property owner have at least 30 percent equity in the property following cash withdrawals. The commercial cash-out refinancing loan is used when property owners take out a loan against their equity and employ the cash-out option to make property improvements.

A cash-out loan will have a higher interest rate than the initial loan. One should only use this option if you have an urgent need for cash.

Buying Out Investors

A sponsor can buy some investors out to increase its share. For example, a sponsor can invest 10% of their own funds to the entire equity necessary to purchase a property and raise the other 90% from other investors. In such a situation the sponsor is known as the General Partner, while investors are known as the Limited Partners.

Secondary Trading in Investments (SecondRE)

Real estate investments may be out of reach for the average investor. SecondRE allows you to purchase fractions of real estate assets at an affordable price from existing investors.

This market allows investors to purchase and sell fractions of commercial real estate assets on their terms and with the sponsors’ approval. This basically lets investors sell their investments throughout the holding period.

Commercial Real Estate Refinancing Explained

Commercial real estate refinancing aims to acquire access to the investor’s equity value in the property. The goal is to invest in other properties or for other uses as the investor sees appropriate. It depends on the property’s worth, or rather the change in the property’s value from the time it was acquired. Another aspect to consider is the property’s income-generating potential.

It is vital to refinance a property whose net operating income value has improved. While commercial and residential property loans vary in terms of loan duration, there are no stipulations prohibiting it from extending a loan tenure into something long-term. While the average tenure of a loan is seven years, some have been known to extend for longer periods. This is due to the nature and holding of the property.

For example, a residential property owner often plans to live in the home for as long as possible, which becomes a lifetime investment. It can even be as long as 30 years. In the case of commercial properties, however, the intention is not to remain there permanently.

The goal is to generate income from the property as quickly as possible to gain profit and use it for growth. Therefore, it makes sense for a commercial real estate investor to have a shorter duration. Moreover, an investment tied to a long-term liability will eat into the profit through interest rates, which might not be a wise investment plan.

Loan and Debt Refinancing

A traditional refinance loan is typically used to lock in a lower interest rate. A cash-out refinancing loan allows the borrower to take cash out of the property’s equity. 

Usually, lenders require owners to maintain 30% of the property’s equity after the cash is withdrawn. Mortgage bridge loans are short-term loans that “bridge” the amount of time it takes to complete a long-term loan. These interest-only loans have a high balloon payment and are an option for renovations when borrowers are not eligible for traditional financing. 

Refinancing can also be a method to pay off debts with more favorable terms and conditions to the borrower. This practice is called debt refinancing, as the new loan aims to pay off existing obligations. Another benefit of debt refinancing is turning variable-rate debts into fixed-rate debts. This is a common practice when lower interest rates are available.

Related: What is liquidity in CRE and when do you need it?

When & Why Is Refinancing Useful?

The major reason people consider refinancing is to reduce their monthly payment. However, there are many other reasons to consider refinancing such as extending the mortgage term, getting a bridge loan, improving cash flow, utilizing complex tax strategies, changing the investor composition and project control, etc. Few property owners refinance to increase the property’s value or for additional investment or development purposes.

commercial high rises

Avoid Balloon Payment

Refinancing is extremely important if there’s a balloon payment due soon and there’s not enough cash on hand to make the payment. To avoid default, refinancing to a longer-term loan will help build equity and improve cash flows.

Lower Interest Rates / Payments

Refinancing is the ideal alternative for people seeking a lower interest rate. In most circumstances, you may prevent fluctuating interest rates by selecting a guaranteed fixed interest for at least ten years.

Due to the high processing fees associated with refinancing real estate, you should only do so if you can reduce your interest rate by 2% or more.

Debt Consolidation

Several property owners may refinance to combine multiple debts on multiple properties. They may finally keep a single loan and benefit from lower interest rates and reduced fees or penalties.

Equity Disbursement

Refinancing loans may be the most effective way to pay off current debt and can also be used to acquire equity. This may free up funds for use in other initiatives.

Expand Your CRE Portfolio

It’s very common for real estate owners to refinance a commercial property to grow their portfolios. This is how investors amassed fortunes through real estate. 

This is called “leverage,” which allows investors to benefit from a loan with a lower value than the investment rate on a commercial property compared to the transaction’s cash-on-cash return. A leveraged asset acquires equity over time after paying off the loan principal.

Utilize the Broader Real Estate Capital Markets

Real estate financing markets remain liquid, even with the increased underwriting rules many lenders operate under. However, increasing interest rates and other Fed activities may influence this in the future. To battle inflation, the Fed has signalled its intention to hike interest rates many times through 2023 and to use quantitative tightening programs to lower the economy’s cash supply.

This does not imply that the market won’t provide competitive refinancing solutions. The approach today may need additional time and investigation to uncover such prospects. Your present financial institution may be prepared to arrange a new real estate loan to better serve their customer. This all depends on the loan amount, asset type, borrower, flexibility requirements, and other variables to see if the lender is the right match. 

Transacting in the real estate capital markets demands access to a vast network of lenders and the skills to analyze the experience of those lenders and their loan conditions. For many investors, employing a trusted adviser to supervise the whole process makes sense. 

Explore Less Traditional Real Estate Financing

Conference room

Before approaching your lender, you should be informed of all your prospective sources of revenue including:


Non-traditional financing, such as sale-leasebacks, may offer up to 100% of the property’s worth, but conventional financing is limited to particular loan-to-value ratios (usually 50% to 75%). 

A sale-leaseback is a process through which owners sell their building to a new owner while concurrently leasing it back. This may create income from the real estate asset while preserving long-term control over the area.

State and federal Program

Even before the pandemic, federal and state initiatives gave building owners extra cash. For instance, certain programs assisted property owners in assessing the availability of PACE money to finance energy-saving renovations and in acquiring brownfield funds for cleaning or redevelopment.

Local Incentives

As communities focus on economic growth, many municipalities provide incentives to assist businesses inside their borders to expand or relocate strategically.

Related: What is a 1031 Exchange?

Should You Refinance Commercial Real Estate During This Time?

Through the first quarter of 2022, real estate prices continued to skyrocket. In the near future, rising interest rates, anticipated until 2023, might reduce or halt the rise of real estate value while increasing debt. However, conventional refinancing remains possible, provided you can engage the broader financial markets, remain active in the due diligence process, and navigate any potential obstacles. The outcome might be increased loan revenues and reduced interest rates.

In addition to standard refinancing, it may be essential to investigate unorthodox financing options after analyzing your organization’s capital structure and business objectives.

If your real estate debt will mature in less than 18 months, now is the time to act and start refinancing commercial real estate. Check out our Marketplace today to explore more lucrative deals and insights on commercial real estate investments.

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