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Three refinancing tips to unlock equity from your commercial property

April 22, 2022 Article 5 min read
Nick Gurica Plante Moran Realpoint
Refinancing your organization’s looming commercial property loan could be an opportunity to unlock much-needed equity. If your loan matures in the next 18 months, here’s what you should do.
Asian women framed by tall city buildings thinking about refinancing her commercial building to unlock liquidity in her business

As we move closer to a post-pandemic society, many economic uncertainties remain. Rising inflation and continued supply constraints are presenting significant challenges. Many businesses are also still evaluating future space needs as they grapple with their new work-from-home hybrid models. This uncertainty can be especially amplified with a looming real estate loan maturity.

However, refinancing your real estate could provide an opportunity to unlock the equity built up through years of real estate value appreciation or amortization of an existing loan. With the future still uncertain, extra liquidity from a loan refinance can give your company some security. Before moving forward, there are several factors to keep in mind to avoid potential pitfalls in the refinancing process and try to improve your results.

With the future still uncertain, extra liquidity from a loan refinance can give your company some security.

1. Utilize the broader real estate capital markets

Real estate capital markets continue to be liquid, even with the additional underwriting standards many lenders are working under. However, rising interest rates and other actions by the Fed could impact this moving forward. To combat inflation, the Fed has indicated plans to raise interest rates several times through 2023 as well as begin quantitative tightening policies to reduce the cash supply in the economy.

That’s not to say that the market will be unable to provide competitive refinancing options. The process now may require more time and research to discover those opportunities. Your existing financial institution may be willing to provide a new real estate loan in order to better serve you as its client. But depending on loan size, asset type, borrower, flexibility needs, and other factors, different lenders may be a better fit for your financial needs. Seeking input from a broad range of lender types can ensure you achieve the most competitive terms available in the market.

Engaging the real estate capital markets requires access to a broad network of lenders as well as the expertise to compare the experience of those lenders and their lending terms. For many business owners, it makes the most sense to engage a trusted advisor to oversee the process of brokering mortgages. Your real estate advisor will be able to uncover more options because of their connections in the market, and they can leverage their experience to negotiate on your behalf.

2. Be prepared to advocate for your property

The Great Recession that ended in 2009, and the resulting Dodd-Frank Act of 2010, caused lenders to be much stricter in their loan underwriting and review. This was further amplified in recent years as lenders continue to assess a post-pandemic environment. Many lenders are more sensitive to “red flags” associated with borrowers or the underlying collateral and can significantly adjust their pricing to match this perceived risk. You can vastly improve the effectiveness (and efficiency) of the refinance process, however, by identifying these potential hurdles up front and being involved in the due diligence process.

For example, lenders often use a broad, conservative range of market assumptions to determine the value of commercial real estate (and the loan that can be achieved), especially if they aren’t experienced or sophisticated real estate lenders. However, this approach ignores the pertinent information specific to your building or location. Because the value is a function of the cash flow generated by the property, it should be based on the function and utility of your property as an important part of your business. As the owner and user of the real estate, no one is more intimate with the use of your property, so we recommend you stay involved in the process. Making your case for more appropriate assumptions can result in higher confidence in your application and more proceeds available to your business.

If you have a lease in place, even if that lease is to a related party, the lease rate may also affect the loan value. Restructuring the lease with more marketable terms before reaching out to a lender for refinancing can provide enhanced value.

Recognizing ways you can address common concerns is an effective way to manage hurdles and get through the refinancing process smoothly. As with the mortgage banking process, owners may find that a real estate consultant’s help with structuring favorable lease terms, and identifying additional opportunities to be involved, can positively influence the outcome.

Making your case for more appropriate assumptions can result in higher confidence in your application and more proceeds available to your business.

3. Explore nontraditional real estate financing

Before you reach out to your lender, you should be aware of all your potential sources of capital, or else you risk leaving funds, or other benefits, on the table:

  • Sale-leaseback
    Whereas traditional financing is capped at certain loan-to-value ratios (generally 50% to 75%), nontraditional financings such as sale-leasebacks can provide up to 100% of the value of the property. A sale-leaseback is a process by which owner-operators sell their building and simultaneously leases it back from the new owner. This can generate proceeds from the real estate asset while maintaining long-term control of the space.
  • State and federal programs
    Even before the pandemic, there were federal and state programs that were available to provide additional funding to building owners. For example, we can help property owners evaluate the availability of PACE funding to finance energy-saving improvements or assist in obtaining brownfield dollars for cleanup or redevelopment.
  • Local incentives
    As communities continue to prioritize economic development, many municipalities provide incentives to help the companies within their borders expand or strategically change locations.

Understanding all the options available can ensure your real estate asset is being optimized to best help your company grow. If you’d like more information on nontraditional financing, here are a few resources to start you off:

If your loan matures in the next 18 months, act now

Rising interest rates, which are expected through 2023, could potentially slow or stop the appreciation of real estate value in the near term as well as make debt more costly. However, traditional refinancing is still an option if you can engage the broader capital markets, stay involved in the due diligence process, and nimbly handle any hurdles that arise. The result can be additional loan proceeds and lower interest rates.

In addition to traditional refinancing, it could be worthwhile to explore any nontraditional financing opportunities available, after an analysis of your company’s overall capital stack and business goals.

If your real estate loan is maturing in 18 months or less, the time to act is now. Reach out to our real estate financing experts for help in evaluating your financing options, negotiating the most favorable terms, and managing the refinancing process so you can stay focused on your core business.

Plante Moran Realpoint Investment Advisors (PMRIA), formerly Plante Moran REIA published this article to convey general information about our services and market conditions, not for the purpose of providing investment advice. Strategies mentioned herein may not be appropriate for you. Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain. You should consult an investment professional regarding your own situation.

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