There are many legitimate reasons for refinancing a commercial mortgage, such as avoiding high interest rates or balloon payments. Either way, it is important to know the intricacies of commercial mortgage refinancing.
Commercial Mortgage Basics
When lenders evaluate customers for commercial mortgages or refinancing, they first review the credit histories of the company and the business owner. Then, they carefully analyze the risks of the commercial venture and target mortgage terms. Like with a first mortgage, business owners who present a solid business plan that is based on historical success will most likely convince lenders to approve the loan with favourable terms. For example, a commercial property loan will generally carry fixed or adjustable interest rates.
Most charge penalties for prepayment within the first few years. The majority of commercial loans are structured with a balloon payment that occurs after 10 or 15 years, but some have 20 year schedules. Some business owners, like homeowners, may want to use their equity to raise cash for major projects, emergency expenses or business expansion. This is accomplished through equity loans, refinancing strategies and of course, second mortgages.
Why Businesses Choose to Refinance
There are many reasons why business owners prefer to refinance their commercial mortgages. First, they may want to take advantage of newly available rates that are lower. They may want to reduce their total loan costs by taking advantage of market interest rates that unexpectedly drop. Second, some business owners seek commercial loans with adjustable rates so they can minimize the initial down costs.
Adjustable rate commercial mortgages have been known to experience interest rate increases when the introductory period of low rates concludes. Constantly adjusting rates will make it difficult for business owners to predict their monthly payments. Third, some business people simply may want to cash out if the equity of the commercial property is sizable. Fourth, some business experts know that large balloon payments are avoidable through preemptively refinancing the commercial mortgage. Sometimes, business people prefer development finance solutions in order to secure short term loans.
When refinancing a commercial mortgage, be sure to carefully prepare digital and physical copies of the required paperwork. For example, have copies of recent loan statements, insurance coverage, purchase contacts and recent appraisals. If applicable, prepare copies of the land survey, certified trust agreements and environmental studies completed on the property. If the property produces income, be sure to have copies of the tax and property returns. Many financial organizations expect a copy of the company’s financial statements, such as balance sheets and operating statements.
For entrepreneurs who use personal funds, they may need copies of personal financial statements and tax returns. In order to successfully secure a refinancing, consider including a detailed account analysis of the most recent quarter. Other helpful are current accounts receivable, accounts payable, budget projections and cash flow forecasts. Finally, relevant incorporation documentation may be required, such as certificates of good standing, the articles of incorporation and the partnership or operating agreements.
Collateral assets may be incorporated into the new mortgage contract, which means that they will be liquidated by the lender if the loan isn’t properly repaid. Some entrepreneurs are forced to use personal assets, such as stocks or savings, but others use business assets, such as equipment, inventory and receivables. Regardless of whether it’s personal or business related, real estate is an excellent asset. Lenders prefer real estate because it’s permanent and maintains a fairly stable value.
However, business owners must be sure to first verify what type of real estate is accepted as collateral, what percentage of the property’s value can be borrowed against and if there are any particular property characteristics that may disqualify the real estate from financing, such as wells or septic systems. When attempting to use collateral to secure property development loans, pay close attention to the financial risks and only attempt high risk high return loans if the conditions are appropriate.
As a final tip, be sure to ascertain all of the upfront costs and loan fees before signing anything. These may include appraisal, title insurance, lender processing and environmental report fees. If possible, see how much of these fees can be included in the loan amount and how much will have to be paid out-of-pocket.