There are several issues that can hold up your commercial mortgage refinance. As the credit crisis deepens many of the typical issues have been exasperated as banks and lenders scramble to protect their own balance sheets and loan turn downs may be just a result of the banks issues and nothing to do with the borrowers commercial mortgage refinance, for example.
Commercial Mortgage Refinance - Issue 1.
Banks problems. Due to the stability of banks, most people never even consider that banks can fail. This is especially true of people that did not live through the savings and loans crisis of the 1980's. In the beginning of the credit crisis many people where simply shocked as the first few went under. There was definitely a lever of disbelief.
Like any business with problems, a banks problems maybe wide spread, but the most common currently is the lack of liquidity. This is a direct result of the credit crisis. What is happening to a lot of banks is that they are not able to sell commercial loans into the commercial secondary market. This debt is now clogging their books and tying up their cash. When they originated and closed the loans they had planned specifically to sell the debt. As a result, they have more capital tied up and less cash to lend on your commercial mortgage refinance.
In addition, as banks judge their risks of having to hold onto commercial mortgages long term, many are tightening their standards. If they have to portfolio the loan and service it, they want to be even more confident that the borrower is strong and will be able to survive the general economy .
Commercial Mortgage Refinance - Issue 2
Value. As a sub-segment to the general credit tightening, value or more specifically to commercial mortgage refinancing, loan to value is becoming more and more important. Obviously most banks have increased their loan to value standards. For example most banks wouldn't go beyond 80% -75% on a commercial mortgage refinance a year ago. Now 65% - 75% is the norm. For example if you purchased a property 5 years ago with 85% financing and now you can only get 70% financing on your commercial refinance AND the value has decreased, you've got a problem.
In addition, the problem is dynamic in that commercial real estate values are tied to financing. We are reading about this more on residential side, but it's starting to appear in commercial. For example the debt coverage ratio (which is a measure of the properties/business cash flow) has a direct impact on the level of debt that can be placed on the property. Without getting technical, most buyers for example (on a purchase) are only interested in putting 20 -25% cash into a property as their down payment. If they have to put more into the deal, just so the property cash flows, many buyers will just come to the conclusion the property is overpriced. So the seller will have to drop the price in order for buyers to be interested and in order to get financing.
Therein lies the problem. If the current owner has a 30 year amortization schedule, and the buyer can only find 20 year financing there will be a cash flow issue and the only way to overcome this is by 1. The buyer brings in a higher down payment or 2. The seller reduces the price.
As the sale price is registered, the capitalization rates and comps are noted by the appraisal company. When owners go to conduct a commercial mortgage refinance, that purchase price will have a direct impact on the property's value on the refinance.
