Commercial Real Estate Refinance: Complete Guide

Commercial Real Estate Refinance: Options, Underwriting, and Preparation

Rate-and-Term vs. Cash-Out Refinance

How Lenders Calculate Refinance Proceeds

Proceeds generally follow a waterfall: the lender starts from whichever is lower, its maximum leverage limit or the amount cash flow can support, then subtracts the existing payoff, any prepayment penalty, reserves, and closing costs.

No single number applies to every deal, since leverage limits and cash-flow requirements vary by lender, property type, and market. The hypothetical example below uses a $2,000,000 property with $150,000 in annual net operating income:

Metric	Hypothetical Example
Net operating income (NOI)	$150,000 per year
DSCR required by lender	1.25x
Maximum annual debt service supported	$150,000 ÷ 1.25 = $120,000
Loan-to-value cap	65% of appraised value
Debt yield	NOI ÷ loan amount; used as a secondary check against the cash-flow-based amount

Owner-Occupied vs. Income-Producing Property

Deferred maintenance and upcoming lease rollovers can reduce the supportable loan amount even when current income looks strong.

Preparing Documents and Expecting Due Diligence

A refinance transaction typically requires a mix of loan, property, and financial documentation:

Lender and Program Options

Several sources of refinance capital exist, each with a different risk appetite and process:

Lender Type	General Fit
Bank or credit union	Relationship-based lending, often flexible on smaller or owner-occupied deals
Life insurance company	Larger, stabilized income-producing assets with conservative leverage
CMBS	Fixed-rate, often non-recourse loans pooled and sold to bond investors
Bridge or debt fund	Shorter-term, higher-cost capital for transitional or repositioning situations
SBA 504 refinance	Owner-occupied business property meeting current qualified-debt and use rules
SBA 7(a) refinance	Eligible business debt, including certain real estate, for qualifying small businesses

Prepayment Costs and the Break-Even Question

A loan document review by counsel or the current servicer is the only reliable way to get an exact prepayment figure. A simple break-even check divides total transaction costs by expected monthly debt-service savings, showing roughly how many months it takes to recover the cost, before accounting for any balloon payment.

If the Appraisal or Cash Flow Falls Short

When a new appraisal or updated NOI supports less proceeds than hoped, borrowers may have several options rather than one guaranteed path:

None is guaranteed to work in every situation, and a commercial real estate attorney or CPA can help evaluate which option fits.

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Frequently Asked Questions

Is a commercial real estate refinance always cheaper than a loan modification?

No. A modification with the existing lender can sometimes avoid new closing costs and a prepayment penalty entirely, so compare both paths rather than assuming a full refinance is automatically better.

What DSCR or LTV do I need to qualify?

There is no universal number. Required debt service coverage ratio and loan-to-value limits vary by lender, property type, and market conditions, so a specific lender’s underwriting guidelines are the only reliable source.

Does the Truth in Lending Act apply to my commercial refinance?

Generally, TILA governs consumer-purpose credit, not business-purpose commercial real estate loans, though exact coverage can depend on transaction specifics, so confirm applicability with qualified counsel rather than assuming either way.