If you own a commercial real estate business, you can access additional funds to grow your business through commercial property refinancing, even if you have an active commercial loan.
This form of financing resembles residential remortgaging, wherein borrowers switch from one loan product to another by offering the same property as loan security. In commercial property refinancing, lenders offer borrowers new commercial loans on an existing property. The loan should be repaid over the agreed timeframe for a borrower to regain the full title of their commercial property.
Commercial property refinance has various advantages and disadvantages. Here are several of them:
Pros Of Commercial Property Refinancing
The following are three critical advantages of commercial property refinancing:
1. Helps Property Owners Avoid Balloon Payments
Commercial real estate loans tend to mature faster compared to residential ones. Although the loans are designed to amortize over 25 years, most of them fall due within a few years of making incremental repayments.
While the average term of residential mortgages is three decades, commercial loan terms tend to have loan terms of two, five, or ten years. Once the loan term for a commercial loan ends, a balloon payment for the remaining amount is required.
In most cases, the balloon payments are large lump-sum amounts that commercial property owners find challenging to raise. Commercial property refinance enables borrowers to avoid such payments.
2. Provides Access To Property Improvement Financing
Another advantage of commercial real estate refinancing is that it allows property owners to leverage their equity to access funds to improve their properties. Often, this is done through cash-out finance, wherein property owners are allowed to borrow more cash than what they owe the lender on the same property.
In such situations, the difference between the borrowed amount and the owed amount is paid in cash. Property owners can use those funds in the way they see fit. Most commercial property owners opt to use the funds on improvements. By improving or renovating their properties, they can charge higher rental rates, which increases their profits.
3. Allows For Negotiating Better Loan Terms
Commercial real estate refinancing also allows property owners to secure better loan terms or interest rates. While the interest rates for commercial loans are often higher than those for residential loans, taking a refinancing loan when interest rates drop enables property owners to reduce their monthly payments. Such moves allow commercial property owners to increase their cash flow.
Commercial refinancing also enables property owners to get better loan terms by adjusting interest rates. If the rates increase, property owners can negotiate loan terms to refinance with a fixed-rate interest for better stability. Furthermore, commercial loans attract prepayment penalties. Property owners may switch to a loan that doesn’t have a penalty during refinancing.
Cons Of Property Refinancing
The following are the main disadvantages of taking commercial property refinancing:
1. Commercial Property Refinancing Is Costly
A major disadvantage of taking a commercial property refinance is the cost involved in processing the loan. Commercial borrowers have to pay arrangement fees and legal fees to access the loan. Furthermore, they have to involve their accountants in the loan application process, which means additional charges in professional fees.
Where property owners choose to change lenders, current lenders may charge for early loan repayment, further increasing the cost of accessing refinancing.
2. Interest Rates Aren’t Permanently Fixed
Although commercial real estate loan refinancing gives property owners a chance to adjust to fixed-rate interests, the change doesn’t apply to the entire loan term. The fixed-rate interest option that cushions them against changes in interest rates applies for a set period, after which the loan reverts to an adjustable interest rate.
Since interest rates may increase significantly after the fixed-rate period expires, property owners risk paying more in interest rates.
3. Can Extend Loan Repayment Period
Another disadvantage of refinancing a commercial property loan it can increase the loan repayment period for property owners who take it up. With the extended mortgage period, property owners end up repaying much more overall, which makes refinancing all the more costly in the long run.
Most lenders provide refinancing loans to commercial borrowers to grow their businesses. Often, lenders require borrowers to meet set requirements. These include providing financial information, like business plans, profit and loss statements, balance sheets, and cash flow statements.
Most lenders also require borrowers to provide valuation reports of the property they wish to refinance. While refinancing a commercial property loan enables borrowers to negotiate f fixed-rate interest, this rate only applies for a fixed period. Once the period lapses, borrowers may end up paying high-interest rates.