A commercial mortgage refinance can be a good tool for commercial real estate loan borrowers to get cash, tax-free, from their commercial real estate properties. A typical example would be an apartment loan for $7 million that was used to acquire a multi-family property for a $10 million purchase price. Assume that the loan was a 10 year fixed-rate loan. At the end of 10 years, the property may be worth $20 million, and based on a traditional 75% loan-to-value, the borrower can now qualify for a $15 million loan, which nets $8 million cash proceeds to the borrower. Since this $8 million is refinance proceeds, and not income, there is no tax due at time of refinance.
Other common uses for a mortgage refinance are for stabilization of transitional properties that have short term bridge loans in place. A commercial mortgage refinance can typically provide the borrower with a long-term fixed rate loan to replace a short-term higher interest rate bridge loan. Using the example from above, say that at the time the $7 million apartment loan was used to purchase the property, the apartment building was 60% occupied and in need of renovation. The buyer may not have been able to qualify for a long-term permanent loan and instead utilized a short-term bridge loan to make the aquisition. Subsequently the property was improved, and rents and occupancies increased and stabilized and maybe the building was worth $30 million at stabilization, allowing the borrower to qualify for a $22.5 million permanent loan. Depending on the desires and characteristics of the borrower, it may be more attractive to start with a higher interest rate, short-term loan in order to qualify for a much larger commercial mortgage refinance at stabilization.
Its a good idea for the borrower to consult with a commercial mortgage broker to help assess and determine the best financial structure and products available so as to maximize the commercial mortgage refinance potential. We serve clients throughout the city of Los Angeles and the surrounding cities including: San Diego, Orange County, San Francisco, Santa Barbara.