Commercial Real Estate Financing and Refinancing

Commercial property is real estate that is used for business with the sole purpose of generating income. This includes office buildings, malls, warehouses, hotels, and other business establishments. A business mortgage loan, also referred to as a commercial real estate loan or commercial mortgage, is often a strong choice for long-term real estate financing. It can enable new and thriving businesses to obtain, develop, and renovate new commercial properties, which will then directly or indirectly generate income for the business.

The loan-to-value ratio—the percentage of the property’s value that the bank would finance—is one of the most essential terms. Depending on the building’s condition, resaleability, and other considerations, banks typically offer to finance up to 75 to 80 percent of the value of commercial real estate. 

Any gap will almost always have to be covered by your company’s working capital or your personal funds. A greater loan-to-value ratio suggests more money is available to invest in expansion or cover cash shortfalls in the short term.

The amortization term is a second variable. For commercial real estate, this normally varies from 15 to 25 years. A longer amortization term may be better because it ensures that more money remains in your company’s hands right now.

The bank’s flexibility in terms of loan repayment is a third key factor to examine. For example, you might be able to acquire a one- or two-year principal payment holiday to cover the cost and inconvenience of the transfer. Alternatively, if you have a cash shortage later, flexible terms may allow you to make interest-only payments for a few months.

Place your commercial real estate acquisition into a separate holding company.

It is often wise to place your commercial real estate into a holding company separate from the operating business. This can facilitate the eventual sale of your business because many buyers will want to acquire only the operating company. For some, it makes for a more affordable acquisition; for others, it makes it easier to move your operations across town or to another city.

It also makes it easier for an entrepreneur to hold on to the real estate and use it as a source of retirement income after the sale of the business. It facilitates the succession of the business.

How commercial real estate refinancing works 

Not only is refinancing commercial property possible, but it also has some benefits. Borrowers refinance a commercial property to take advantage of more favourable loans or to cash out on property equity. Before you decide to refinance your commercial property, here are a few things you should consider: 

Refinancing a commercial property involves taking advantage of the value of your property to change your loan rates, and loan terms, or to increase cash flow for other investments. Commercial refinancing is dependent on the profitability of the business and the value of the property. A profitable business is determined by its NOI (Net Operating Income), the difference between all business income and essential operational costs. You are more likely to get more favourable loan terms if your business is profitable.   

Types of commercial refinancing 

There are two main commercial refinancing options. Loan refinancing and cash-out refinancing. Loan refinancing is the most common type of refinancing and involves taking out a larger loan, usually enough to cover your existing mortgage. The new loan is used to pay off your current mortgage, leaving you with one loan that has a lower interest rate or monthly payments. Cash-out refinancing allows you to access the equity on your property for cash. It also involves taking out a bigger loan and using the proceeds to invest in other ventures.

Benefits of Commercial Refinancing

The primary benefit of commercial refinancing is increasing cash flow. Refinancing could help you with the following:  

• Reducing your interest rates.  
• Lowering your monthly mortgage payment.  
• Changing your loan term. 
• Leveraging equity on your property for other financial investments such as building improvements, commercial equipment, or investing in other properties.  
• Consolidating large debt into a single monthly payment. 
• Paying back investors more quickly. 

While there are many advantages to refinancing, there are some challenges associated with it. Like any mortgage, refinancing comes with hefty closing costs that could reduce your profits. It is important to carefully compare loan terms to ensure you are saving money in the long term. Whatever the reason or the circumstance, our team can help you navigate the financing or refinancing process for your commercial property.

At Lazarus Legal, we provide seamless legal advice on various aspects of commercial real estate. If you need real estate advice, legal opinions, or contract assessments, our team of real estate law experts is here to help.

We provide our business and individual clients with personalized legal advice on all types of commercial real estate transactions. If you need help with a contract, negotiations, signing a lease, or anything else, our team is here to help guide you through every step.