The Florida real estate market has had its ups and downs, but it has been a solid location for commercial real estate investments. Commercial real estate generally is income-producing commercial property, such as an apartment complex, an office building, a retail strip center or something similar. It could have one tenant or hundreds of tenants. Some property owners may occupy some or all of the property with their own business. Commercial real estate is usually financed using a commercial real estate loan. These loans are similar to residential mortgages in many ways, but they have nuances, requirements and features that are tailored to the commercial market. Just as you can refinance a residential mortgage, you have this option with a commercial property loan. Before you refinance a commercial property in Florida, it is wise to walk through a few important steps.
Define Your Refinancing Goals
There are numerous reasons why you may wish to refinance a commercial property in Florida. For example, some investors are eager to lower their mortgage payment. By doing so, they may increase monthly cashflow from the property. Another reason to refinance may be to adjust the term or to eliminate some undesirable features related to an existing loan. Each loan program has unique features, such as assumption clauses, recourse, prepayment penalties and more.
Some investors refinance a commercial property to pull equity out for important purposes. For example, if you have a substantial amount of equity in a property, you may need to use some of that equity to pay for major improvements to the subject property. You may also use that money to purchase other investments, to pay off personal debt or to splurge on an extravagant item.
There are numerous loan programs available for you to consider, and you may find that only a handful are ideal for your situation and goals. It is easy to get caught up in examining all of the options, so it is important to first clearly define what you want to accomplish from this process.
Analyze Your Situation
The next important step to take is to determine if your goal is realistic based on the current situation. For example, depending on the property type that you wish to refinance, a typical lender may only offer between 60 to 75 percent loan-to-value. The loan-to-value available for a refinance is typically lower than what is available for a purchase loan. In addition, it is uncommon to find a lender that allows a second lien to remain in place on a refinance.
Take a closer look at the property’s current market value. Consider getting an estimate from a real estate agent based on comps in the area. Remember that a lender typically will order a new appraisal to confirm the current property value as part of the loan process. Then, subtract the current principal balance of all loans on the subject property. Remember to factor in prepayment penalties and other related expenses. In addition, remember that a new loan request will have related financing fees. These could equate to thousands of dollars or more. Determine if you will roll these into the new loan or if you will pay for them out-of-pocket.
Through these steps, you can determine how much cash you may be able to pull out of a property. Even if pulling equity out of the property is not a goal, this step will help you to closely estimate if a refinance will cover the payoff and other expenses or if you will need to bring cash to the closing table.
While you are reviewing property-related data, take a closer look at your personal finances. Remember that commercial lenders typically have strict requirements regarding credit scores, financial assets and more. If your financial situation has changed since you purchased your last commercial property, consider speaking with a few lenders about your situation before you move forward wholeheartedly with the refinance process. In some cases, it may be necessary to improve your personal finances before applying for a commercial refinance loan.
Review the Financing Options
As you begin reviewing the financing options available to refinance a commercial property in Florida, you will find that there are numerous loan programs to consider, and these programs may have drastically different requirements and terms. For example, one multifamily loan program may require you to have a 650 minimum credit score and offer a 20-year fixed term with a lengthy prepayment penalty. Another loan program may require you to have 680 minimum credit score, and it may offer a 25-year fixed term without a prepayment penalty. Because there are so many variations, it is important to compare the program details closely. Some of the many factors to compare as you review the options include:
- The term length options
- If a fixed or adjustable term is available
- Minimum credit score requirements
- Cash reserve requirement
- Loan-to-value and minimum or maximum loan amount
- Requirements regarding the size of the market
- Tenancy requirements or lease term requirements
- Debt service coverage ratio
- Prepayment penalty
You can see that there are many factors to consider with a commercial refinance that may not be concerned with a residential mortgage. Some inexperienced investors may be inclined to shop for a commercial refinance mortgage simply by comparing interest rates, but you can see that there are many other factors that also must be reviewed. Your goal should be to find the best terms for your specific situation and goals.
Contact Several Lenders or Brokers
You may find many details about loan programs online, but it is important to actually speak with several lenders or brokers about programs. Commercial finance lingo can seem confusing at times. However, you have potentially hundreds of thousands of dollars or more at stake. Do not be timid about asking for clarification. Some lenders or brokers will ask you to send them a loan proposal. Therefore, it may be helpful if you spend a few minutes typing details about your loan request. Consider including the property type, address, tenant details, gross and net income figures, color photos and personal details about yourself as the applicant. By preparing this information ahead of time, you may be able to more easily request multiple quotes from various lenders in minimal time. If you do not have time available to do the work yourself, find a reputable mortgage broker who will do the work for you. Keep in mind, however, that broker services are not free.
The loan process for each lender or bank is different. Some require you to pay an application fee or other up-front fees before they will look at your loan request or offer loan terms. It is reasonable to expect to pay a fee for a credit report, but large, non-refundable fees should be avoided in most instances. You should be able to review loan terms before you decide to commit to a program financially. While you wait to receive loan terms from different banks or lenders, consider pulling together common documentation that may be needed for a typical loan request. Two to three years of business and personal tax returns, three months of bank statements, a divorce decree, current leases, income and expenses that have been filed with the IRS for the subject property and any recent third-party reports on the property. This may include an appraisal, a property inspection, an environmental report and more. It is wise to let the lender make a formal request for information before you submit this detailed documentation. However, having it on-hand can help you to get through the loan process faster and easier.
If you wish to refinance a commercial property in Florida, be aware that the commercial lending process may take much longer than a residential loan process. For example, it may take several weeks rather than several days for a commercial appraisal to be completed. The actual timing will be related to your ability to submit documentation as requested in a timely manner, the timeline for the third-party vendors and the general underwriting timeline for the lender. Because the commercial financing process can take several months or longer in some instances, it is important to be patient as well as diligent with your responses to the lender throughout the loan process.