Homeowners know that there are times when refinancing can be really beneficial. But homeowners aren't the only people who might want to refinance, especially now with interest rates at an all-time low. It can be a big help to commercial real estate owners too.
So why might you want commercial real estate refinance? There are a number of possible reasons. You might want it as an alternative to selling your property outright, to raise additional capital to expand your business or re-equip. It could be a way to solve a cash-flow problem. Or you could want it to replace credit lines that are shortly due to expire.
However, going for commercial real estate refinance is a very big decision and it's not right in every situation. How can you decide if it's the right way to go in your circumstances? These are some of the points you should consider.
- You need to make a close assessment of your commercial real estate to see if refinancing makes sense for you. For instance, if it's rental property, what are its occupancy averages and what are the prospects for occupancy growth? How are rental rates going to perform?
- Do you have an existing fixed-rate loan? Find out what the penalties might be for early repayment. These could be heavy enough to cancel out any benefit from your commercial real estate refinance.
- How will refinancing affect your cash flow? If there is a reduction in monthly repayment at the expense of a longer amortization period, this may mean you pay more overall. Is this a price worth paying? (It may be, if cash flow is your principal concern right now.)
- Find out the closing costs and how these costs will affect your equity. Also of course you have to look at other costs such as appraisal, environmental inspections in some cases, broker fees etc. Obviously, if you can roll as many as possible of these costs into your loan, the effect on your equity will be minimized. But you need to add up all the costs, add them to the cost of the refinance, and divide the total by the monthly saving in repayments, to find out how long it will take for your savings to cancel out the extra costs. If this figure is high, you may want to think again. However, if you are looking at a long-term rather than a short-term strategy, the commercial real estate refinance could still be worth your while.
- If you are a small business, see if you qualify for refinancing via the Small Business Association's 7(a) program (from section 7(a) of the Small Business Act). Of course in order to obtain a loan you have to satisfy the lender's criteria as well as those of the SBA - the main criterion being ability to repay. But with the SBA guaranty behind you, lenders will be more prepared to consider you. And there are major benefits, such as much higher loan-to-value ratios.
If any or all of these checks lead you to conclude that a commercial real estate refinance is not the right thing for you, there are alternatives. If it is the amount of closing costs that is the main hurdle for you, you could consider a commercial equity loan. Some lenders dispense with closing costs, although the monthly payments may be higher. Another alternative which many have found attractive is sale and lease-back. This can be the the most effective and cost-efficient way to raise capital, plus it enables you to leverage the equity you have added to the property.
Whichever way you decide to go, make sure you use a reputable and impartial financial advisor. The only thing that counts is that you do what is right for yourself and your business.
