Refinancing commercial real estate means that you replace an existing mortgage with a new loan. You might be interested in tapping into the equity you have, lowering your monthly payments or changing the loan terms. Some business owners are looking to make improvements or add extra properties to an expanding portfolio.
One of the important metrics that you’ll need to consider is the loan-to-value ratio when you’re considering this type of refinancing.
It’s a simple formula to calculate what the loan is worth compared to the value of the building.
LTV= the balance on the mortgage divided by the value of the property multiplied by 100.
Commercial Real Estate Risk
It’s important to remember that commercial mortgages are more risky than residential varieties. One of the reasons is simple. Residential mortgages are usually given to individuals whereas commercial mortgages are sought out by corporations are businesses.
That can make it more difficult to access income history and credit. There are several other requirements that come into play. Lenders often want to see a few years of a stable operating history before they allow you to refinance.
Specific Time Frame
The chances are they will also want to see your net operating income for a specific time frame. This is the measure of a property’s gross income subtract operating expenses. The net operating income does not include income taxes and debts.
Generally, the better your net operating income the more chances you will have to refinance your commercial loan. Keep in mind that these requirements vary by loan program and lender depending on the size of the property and the type of business you’re in.
Refinancing a commercial real estate property can also help you consolidate other debts. Many business owners use this financial tool to expand their investment property portfolios.
