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.