Your commercial mortgage term is coming up for renewal. Or maybe rates have dropped and you want to refinance early. Or perhaps you want to pull equity out for another investment.
Let me walk you through commercial property refinancing—when it makes sense, how the process works, and how to get the best possible terms.
Why Refinance Commercial Property
Refinancing serves several purposes. Understanding your goal helps you structure the refinance properly.
Lower interest rates: If rates have dropped since you got your mortgage, refinancing can reduce your payment and save thousands in interest.
Better loan terms: Maybe your current mortgage has restrictive covenants or limited prepayment privileges. Refinancing lets you get better terms.
Pull out equity: If your property has appreciated or you’ve paid down the mortgage, you can refinance for a larger amount and pull out cash for other investments, property improvements, or business needs.
Consolidate debt: If you have multiple mortgages or other debts on the property, you might refinance to consolidate everything into one loan.
Change lenders: Maybe you’re unhappy with your current lender’s service or renewal terms. Refinancing lets you switch.
Remove partners or add partners: Property ownership is changing and you need new financing to facilitate the transition.
Be clear on your objective. This guides decisions throughout the refinance process.
Renewal vs Refinancing: Understanding the Difference
These terms are often confused but mean different things.
Renewal: Your mortgage term ends and you renew with the same lender. The loan amount stays the same (except for payments you’ve made). You’re just getting new terms for another period. This is usually simple and low-cost.
Refinancing: You’re paying off your existing mortgage and getting a new one. This might be with a different lender, for a different amount, or on different terms. This is more involved and can trigger costs.
Most of what I’ll discuss applies to true refinancing. Renewal is simpler—the lender sends you renewal terms, you either accept them or shop around for better terms and refinance.
When Refinancing Makes Financial Sense
Refinancing costs money and takes time. Make sure the benefits justify the costs.
Interest rate savings: As a rule of thumb, if you can reduce your rate by 0.75% to 1.00% or more, refinancing often pays off. On a $500,000 mortgage, a 1% rate reduction saves about $5,000 annually. Over a 5-year term, that’s $25,000 in savings—enough to cover refinancing costs and still come out ahead.
Cash-out needs: If you need capital and your property has equity, cash-out refinancing might be cheaper than other financing options. Compare the cost to alternative financing sources.
Improved property performance: If your property’s value has increased significantly or income has grown, you might qualify for better terms than before.
Avoiding renewal terms: Sometimes your current lender’s renewal rate is far above market. Refinancing to a competitive lender makes sense even if you incur some costs.
Run the numbers. Calculate total costs of refinancing versus the benefits. If you’re saving $5,000 per year but refinancing costs $15,000, you need at least three years to break even.
Timing Your Refinance
When you refinance affects costs and makes sense strategically.
At term maturity: This is the cleanest time. Your mortgage term ends, there are no prepayment penalties, and you simply get new financing. Plan for this 3 to 6 months before your term ends.
Before term maturity: If you refinance early, you’ll face prepayment penalties. These can be enormous—often tens of thousands of dollars. Calculate whether the benefits of refinancing early justify the penalty cost.
When rates drop: If rates have declined significantly since you locked in, refinancing might make sense even with penalties. Calculate the penalty versus total interest savings over the remaining term.
When property value increases: If your property has appreciated substantially, refinancing to pull out equity can fund other investments with better returns than the refinancing costs.
When you need capital: Sometimes you need cash now regardless of optimal refinancing timing. Just understand the costs and structure it accordingly.
The Refinancing Process Step-by-Step
Here’s what actually happens when you refinance.
Step 1: Evaluate your situation. Review your current mortgage terms, calculate your property’s current value, determine how much you want to borrow, and estimate costs versus benefits.
Step 2: Shop lenders. Talk to multiple lenders or work with a broker to find the best terms available. Get actual rate quotes and fee schedules in writing.
Step 3: Apply formally. Once you choose a lender, complete a full mortgage application. This is like applying for a new mortgage—you’ll need all the same documentation.
Step 4: Property appraisal. The new lender orders an appraisal to verify current value. This typically costs $2,500 to $5,000.
Step 5: Lender underwriting. The lender reviews your application, financials, and property information. They analyze income, expenses, DSCR, and creditworthiness.
Step 6: Commitment. If approved, you receive a mortgage commitment outlining terms and conditions.
Step 7: Legal work. Lawyers prepare documents to discharge your existing mortgage and register the new one.
Step 8: Closing. You sign documents, the new mortgage funds, your old mortgage is paid off, and any extra funds (if cash-out refinancing) are advanced to you.
The timeline is typically 4 to 8 weeks from application to closing.
Documentation You’ll Need
Refinancing requires comprehensive documentation similar to a purchase.
Personal financial documents:
- Two years of personal tax returns
- Current personal financial statement (net worth statement)
- Bank statements (3 to 6 months)
- Credit reports
Property financial documents:
- Current rent roll
- Copies of all leases
- Operating statements for the past 2 to 3 years
- Property tax bills
- Insurance declarations
- Recent capital improvements documentation
Corporate documents (if applicable):
- Corporate tax returns
- Corporate financial statements
- Articles of incorporation and corporate resolutions
Existing mortgage information:
- Current mortgage statement showing balance
- Terms of existing mortgage
- Prepayment penalty calculation
Gather everything in advance to speed the process.
How Lenders Value Your Property
The appraisal determines how much you can borrow. Lenders typically lend up to 70% to 75% of appraised value on refinancing.
If your property appraises at $1.2 million and the lender offers 70% LTV, you can borrow up to $840,000. If your current mortgage balance is $500,000, you could pull out up to $340,000 in cash (minus costs).
If the appraisal comes in lower than expected, your refinancing amount might be limited. This is why understanding likely appraised value before applying is important.
Lenders use the same appraisal approaches discussed earlier—income, sales comparison, and cost. For refinancing, they’re particularly interested in how the property’s income has performed under your ownership.
Calculating Available Equity
Here’s how to estimate how much you could pull out.
Current appraised value: $1,200,000 Maximum LTV (75%): $900,000 Current mortgage balance: $550,000 Maximum new mortgage: $900,000 Minus current balance: -$550,000 Minus closing costs (3%): -$27,000 Available cash-out: $323,000
This calculation shows you could access approximately $320,000 in equity through refinancing at 75% LTV.
Note that cash-out refinancing often faces lower LTV limits than regular refinancing. Where you might get 75% LTV to simply refinance existing debt, you might only get 65% to 70% LTV for cash-out. Check with lenders about their specific policies.
Cost of Refinancing
Refinancing isn’t free. Budget for these costs.
Prepayment penalty: If refinancing before term end, this can be massive. Calculate it before committing to refinance.
Appraisal fee: $2,500 to $5,000 for commercial appraisals.
Legal fees: $1,500 to $3,000 for your lawyer plus similar for lender’s lawyer.
Lender fees: Application fees, commitment fees, underwriting fees—potentially 0.5% to 1.5% of the loan amount.
Title insurance: Required by new lender, typically $1,000 to $3,000.
Environmental assessment: New lenders usually require updated Phase I ESA, costing $2,500 to $5,000.
Total costs often run $10,000 to $25,000 or more. Make sure the benefits justify these costs.
Negotiating Better Terms
Use refinancing as an opportunity to improve your mortgage terms.
Rate: Obviously important. Shop aggressively and negotiate.
Prepayment privileges: If your current mortgage has limited prepayment options, negotiate better privileges in the new mortgage.
Amortization: If you have 20 years remaining on your amortization, could you reset to 25 or 30 years to reduce payments?
Term length: Choose term length strategically based on your plans and rate environment.
Covenants: If your current mortgage has restrictive covenants, try to eliminate or loosen them.
Fees: All lender fees are somewhat negotiable. Ask for reductions or waivers.
You’re shopping for a product. Don’t accept the first offer without comparing and negotiating.
Cash-Out Refinancing Strategy
If you’re pulling equity out, use it strategically.
Down payment on another property: Using equity from Property A to buy Property B is a common wealth-building strategy. You’re leveraging appreciated value to expand your portfolio.
Property improvements: Reinvesting in the property through renovations or upgrades can increase value and income, justifying the additional debt.
Debt consolidation: Paying off higher-interest debt with lower-rate mortgage debt can improve cash flow.
Business investment: Funding business growth or opportunities with property equity can make sense if the returns justify it.
Emergency reserves: Building larger cash reserves provides financial security, though this is expensive money just to hold in the bank.
Have a clear plan for cash-out proceeds. Don’t pull out equity without specific purpose.
Tax Implications of Refinancing
Refinancing has tax considerations to understand.
Interest deductibility: Mortgage interest on commercial properties is generally tax-deductible as a business expense. This continues with the new mortgage.
Cash-out taxation: The cash you pull out through refinancing isn’t taxable income—it’s borrowed money you’ll repay. But how you use it might have tax implications.
Refinancing costs: Most refinancing costs are tax-deductible, though some may need to be amortized over several years rather than deducted immediately.
GST/HST: Some refinancing fees might be subject to GST/HST. Understand the tax treatment of all costs.
Consult your accountant about the tax optimization of your refinancing.
Impact on DSCR and Cash Flow
Refinancing changes your debt service, which affects cash flow and DSCR.
If reducing your rate: Your payment decreases, improving cash flow and DSCR. This is positive.
If pulling cash out: Your loan balance increases, so payments increase, which reduces cash flow and DSCR. Make sure you still meet lender minimum DSCR requirements (typically 1.20 to 1.25).
If extending amortization: Even if your loan balance increases, extending from 20-year to 30-year amortization might keep payments similar or even reduce them.
Run DSCR calculations with your proposed new mortgage to ensure you’ll still qualify and have adequate cash flow.
When Refinancing Doesn’t Make Sense
Sometimes staying with your current mortgage is smarter than refinancing.
Prepayment penalties are huge: If you’re three years into a 5-year term at a rate 1% above current market, but your prepayment penalty is $75,000, refinancing probably doesn’t pay off.
Minimal rate improvement: Refinancing to save 0.25% might not justify the costs unless your loan is very large.
Short remaining term: If you only have one year left on your term, wait for maturity rather than refinancing early.
Property value hasn’t increased: If you don’t need cash-out and you’re not saving meaningfully on rate, there’s little benefit.
Your situation has weakened: If your credit has dropped, property income has declined, or your financial situation has deteriorated, you might not qualify for better terms than you have. Stay put.
Do the math objectively. Sometimes the answer is “don’t refinance.”
Working with Your Current Lender
Before shopping elsewhere, talk to your current lender about renewal or refinancing.
They have several advantages:
- They know the property and your payment history
- They might match competitive offers to keep your business
- Staying with them avoids some costs (new appraisal might not be required, legal costs are lower)
Ask what terms they’ll offer. If competitive with market, staying might be easiest. If they’re significantly above market, use their offer as a baseline for shopping.
Some lenders get lazy on renewals, offering poor terms because they assume you won’t shop around. Don’t let them take advantage. Make them compete.
Multiple Mortgages and Refinancing
If you have multiple mortgages on the property (first and second), refinancing can consolidate them.
The new first mortgage must be large enough to pay off both existing mortgages. The second mortgage holder must agree to be discharged.
This simplifies your debt structure—one payment instead of two, potentially lower blended rate, cleaner structure for future dealings.
But if one of your existing mortgages has a great rate, refinancing might mean giving that up. Evaluate whether consolidation benefits outweigh losing good terms on one mortgage.
Refinancing to Remove or Add Partners
Property ownership changes sometimes require refinancing. One partner wants out, or you’re bringing someone new in.
The existing mortgage is in the current ownership structure’s name. Changing ownership means getting a new mortgage in the new structure’s name.
The departing partner typically gets bought out with cash from the refinancing. The remaining partners refinance for enough to cover the payout plus the existing mortgage balance.
This requires all partners to agree on valuation and buyout terms. Work with lawyers to document everything properly.
Your Refinancing Action Plan
Three to six months before you want to refinance:
Step 1: Determine your goals—lower rate? Pull cash out? Better terms?
Step 2: Review your current mortgage—what’s your balance? What are prepayment penalties? What’s your rate?
Step 3: Estimate your property’s current value and likely appraised value.
Step 4: Calculate how much you could borrow at typical LTV ratios.
Step 5: Shop lenders or engage a broker to shop for you.
Step 6: Compare offers carefully—rate, fees, terms.
Step 7: Calculate total costs versus benefits.
Step 8: Choose the best option and apply formally.
Step 9: Complete the refinancing process.
This systematic approach ensures you make informed decisions.
Moving Forward
Refinancing is a powerful tool for optimizing your commercial mortgage, accessing equity, and adapting to changed circumstances. But it’s not automatic—you need to evaluate whether it makes sense and structure it properly.
At Creek Road Financial Inc., we help clients navigate refinancing decisions regularly. We can calculate whether refinancing makes financial sense for your situation, shop multiple lenders to find the best terms, and guide you through the process smoothly.
Your mortgage is one of your largest expenses and your largest debt. Make sure it’s working optimally for you. Refinancing at the right time and on the right terms can save you tens of thousands of dollars and unlock capital for growth. That’s worth doing right.