A commercial refinance must solve both the new loan and the old payoff. Start by sizing debt against current income and value, then subtract the payoff, prepayment costs, closing costs and reserves. A property can have equity and still need additional cash to refinance.
The reason for refinancing matters: an approaching balloon maturity, repayment of a bridge loan, cash out after improvement, or a better structure for the next holding period. Each needs a different comparison.
When should you start a commercial refinance?
Begin reviewing the loan well before its maturity or extension-notice deadline. A practical planning window is three to six months before the intended closing, with more time for a complex asset, lease-up, significant repairs or an expected equity gap. This is a planning recommendation, not a promised lender processing time.
Separate the loan term from the amortization period. A loan can calculate payments over a long amortization schedule while requiring the remaining principal to be paid at an earlier maturity. An extension is available only if the documents provide for it and its conditions are met, or the lender separately agrees.
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| Stage | Work to complete | What to establish |
|---|---|---|
| Early review | Read the note, loan agreement, amendments and extension provisions. Update income, value and loan sizing. | Maturity, notice deadlines, payoff exposure and likely equity requirement. |
| Before choosing a lender | Compare proceeds and structure on the same income, valuation and payoff assumptions. Identify third-party reports and legal requirements. | A realistic closing path and an alternative if the first option fails. |
| During underwriting | Resolve appraisal, environmental, insurance, title, lease and entity requests. Refresh the payoff for the intended closing date. | Remaining conditions, revised net proceeds and funds required. |
| Before closing | Confirm final figures, available cash, payoff instructions and release requirements with the closing team. | The amount that actually retires the old debt and completes the refinance. |
The OCC's refinance-risk guidance explains why current performance, collateral values and the ability to replace outstanding debt matter near maturity. It also addresses stress testing rather than assuming the original loan can simply be repeated.
Example: a $4 million refinance still needs $100,000
Assume a hypothetical property supports a new $4 million gross loan after DSCR, LTV and debt-yield review. The existing loan has a $3.9 million principal balance. Assume the refinance closes while a contractual 2% prepayment premium still applies. All amounts below are illustrative, not actual quotes or a completed transaction.
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| Line item | Amount | Treatment |
|---|---|---|
| New gross loan | $4,000,000 | Available financing before the items below. |
| Existing principal payoff | ($3,900,000) | Principal to retire. |
| Accrued interest and payoff charges | ($20,000) | Assumed additional payoff charges. |
| Prepayment premium | ($78,000) | Assumed 2% × $3,900,000 principal. |
| New closing costs | ($60,000) | Assumed fees, reports, legal and closing expenses. |
| New required reserves | ($42,000) | Restricted cash funded at closing, not spendable proceeds. |
| Net cash after uses | ($100,000) | The borrower needs $100,000 to close. |
$4,000,000 − $3,900,000 − $20,000 − $78,000 − $60,000 − $42,000 = −$100,000
The required reserves remain subject to the new loan's release rules. They are not necessarily a permanent expense, but they still affect cash needed at closing. Existing escrows might be refunded separately or credited if permitted; do not count them twice or assume they are available on the closing date.
A quote stating “up to 70% LTV” does not answer this question. The new loan could be limited by DSCR or debt yield before it reaches the advertised leverage ceiling. Work through commercial loan sizing and use the commercial calculator for an initial DSCR and LTV model.
Prepayment costs can change the best closing date
Obtain the actual loan documents and a servicer or lender payoff estimate for your intended date. A monthly statement balance alone does not show everything needed to release the lien. Ask about notice requirements, lockout periods, premium calculations, accrued interest, release fees and the expiration of the quote.
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| Structure | What to verify |
|---|---|
| Step-down premium | The percentage that applies on the actual payoff date, its calculation base and any open window. |
| Yield maintenance | The contractual formula, remaining protected period, market inputs, minimum premium and notice requirements. |
| Defeasance | Whether collateral substitution is allowed, required securities, timing and specialist, legal and servicing costs. |
| Minimum interest or exit fee | Whether these apply even if principal is paid before the expected end of the loan. |
| Extension option | Required notice, fee, performance tests, reserves and whether a principal reduction is needed. |
Fannie Mae's guide to locating prepayment terms illustrates why the note and loan agreement must be checked. Its document references are specific to Fannie Mae loans; other lenders' documents control their own loans.
A lower payment is not always a lower total cost
As a simple hypothetical screen, $140,000 in nonrecoverable transaction costs divided by $5,000 in monthly savings equals a 28-month cash-flow break-even. At a planned sale in 24 months, those savings total $120,000, less than the initial costs. This screen assumes comparable balances and payment structure and ignores the time value of money. If amortization, loan balance or interest-only periods differ, compare principal remaining and total financing costs as well.
A refinance can still serve a different purpose: obtaining more time, releasing approved collateral, changing recourse, funding improvements or replacing a mismatched structure. State that objective clearly instead of judging everything by the first monthly payment.
What if the refinance will not cover the payoff?
- Reconcile the numbers: verify lender NOI adjustments, actual payoff dates, duplicate fees and the timing of escrow refunds.
- Plan additional equity: establish a documented source and the sponsor's remaining liquidity, not just the amount needed on closing day.
- Discuss an extension early: review the existing lender's requirements while other options remain available. An extension is not automatic.
- Match financing to the property: a property still renovating or leasing may need commercial bridge financing, but another short-term loan should have a supportable exit.
- Evaluate a sale or revised business plan: compare timing, transaction costs and realistic proceeds with the cost and risk of holding.
New construction, a teardown or a heavy rehabilitation may require construction financing or a fix-and-flip structure. A stabilized-property refinance cannot be assumed to fund a materially different project.
What to prepare for a commercial refinance review
- Current note, loan agreement, amendments, maturity date and extension deadlines.
- Recent loan statement and preliminary payoff, including prepayment provisions.
- Current rent roll, leases, trailing 12-month operating statement and recent collections.
- Property tax and insurance information, repair needs and available property reports.
- Estimated value, requested proceeds, use of any cash out and intended hold period.
- Borrowing entity, ownership, sponsor experience and funds available for a shortfall.
Can you refinance a commercial property with lower occupancy?
It depends on the lender and the cause of the vacancy. Supportable in-place income, leasing progress, tenant quality, capital needs and the sponsor's ability to carry the property all affect fit. Compare bridge and permanent financing before assuming a long-term takeout is ready.
Does property equity guarantee cash out?
No. Appraised equity does not replace debt-service capacity, cash-out restrictions or the costs required to retire the existing loan. Cash out is the remaining unrestricted amount after all required uses, not the difference between the appraisal and the old balance.