Unlock equity from your Commercial Property

Refinancing your organization’s looming commercial property loan is a necessity and an opportunity to unlock much-needed equity and improve your financial standing. If your loan matures in the next 18 months, here’s what you should do to seize this opportunity.

As we navigate towards a post-pandemic society, it's crucial to stay informed about the persistent economic uncertainties. Rising inflation and continued supply constraints are presenting significant challenges. Many businesses evaluate future space needs as they adapt to new work-from-home hybrid models. This uncertainty can be significantly amplified with a looming real estate loan maturity, but staying informed can empower you to make the right decisions.

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 an uncertain future, 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 improve your results.

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

1. Utilize the broader real estate capital markets, which include a wide range of lenders such as banks, credit unions, and private investors, to increase your chances of finding a competitive refinancing option.

Real estate capital markets remain liquid, even with the additional underwriting standards many lenders work 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 2025 and begin quantitative tightening policies to reduce the economy's cash supply.

That’s not to say that the market cannot 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 offer a new real estate loan to serve you better as its client. However, depending on loan size, asset type, borrower, flexibility needs, and other factors, different lenders may better fit 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 and the expertise to compare the experience of those lenders and their lending terms. Engaging a trusted advisor, such as a real estate consultant or financial advisor, to oversee the brokering mortgage process makes the most sense for many business owners. 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 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. However, you can vastly improve the refinance process's effectiveness (and efficiency) 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 about 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 essential part of your business. As the owner and user of the real estate, no one is more intimate with using 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 contacting a lender for refinancing can enhance its value.

Recognizing ways to 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 favourable lease terms and identifying additional opportunities to be involved can positively influence the outcome.

Making your case for more appropriate assumptions can increase confidence in your application and the 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 specific loan-to-value ratios (generally 50% to 75%), nontraditional financings such as sale-leasebacks can provide up to 100% of the property's value. A sale-leaseback is a process by which owner-operators sell their building and simultaneously lease it back from the new owner. This can generate proceeds from the real estate asset while maintaining long-term space control.

State and federal programs

Even before the pandemic, federal and state programs 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 available options can ensure your real estate asset is optimized to help your company grow. If you’d like more information on nontraditional financing, here are a few resources to start you off:

What developers need to know about economic development incentives

New Markets Tax Credits can fill the gap in your capital campaign caused by COVID-19

Section 179D provides an added tax deduction for energy-efficient buildings

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

Rising interest rates, expected through 2025, could slow or stop real estate value appreciation in the near term and make debt more costly. This means the longer you wait to refinance, the less equity you can unlock. 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. The result can be additional loan proceeds and lower interest rates.

After analyzing your company's overall capital stack and business goals, exploring any available nontraditional financing opportunities, in addition to traditional refinancing, could be worthwhile.

If your real estate loan matures in 18 months or less, the time to act is now. Contact our real estate financing experts for help evaluating your financing options, negotiating the most favourable terms, and managing the refinancing process so you can stay focused on your core business. Remember, the potential benefits of refinancing are within your reach, so don't hesitate to take action.