Are you looking to refinance your commercial real estate mortgage and are confused as to where to begin?
Ed Kearney of the West Palm Beach commercial real estate brokerage firm Kearney Commercial Realty/Sperry Van Ness has compiled some key steps to follow when embarking on your commercial property refinancing.
1. Prepayment Penalties and Lock Out
Bear in mind that relatively all commercial mortgages hold some form of prepayment penalties, usually in the form of a percentage of the existing loan amount (expect between 3%-5%) declining as the mortgage ages. These fees are only incurred if the borrower prematurely pays off the mortgage loan. Borrowwers often consider that option when interest rates decline sharply or after they have repositioned their property and have a number of credit tenants thereby making the property more valuable and therefore more secure to a lender.
In many cases, private lenders will have higher prepay penalties. This can spell disaster for the borrower since they can dramatically reduce owner’s options when they decide to sell or refinance. Rule of thumb for the borrower is exhaust all conventional borrowers before signing a mortgage with a private lender.
2. Value and Loan to Value (LTV) Concerns
A lower than expected appraised value can substantially alter the terms of a planned commercial property refinancing. Many times the borrower must invest more capital in his property to meet the new loan-to-value and equity standards. In this case, particularly if the loan has been performing, it is recommended that the borrower work closely with the current lender with the goal of extending the loan for several years in the hope that property values will increase and loan terms become more favorable.
Decreasing the inerest rate, extending the amortization period, adding additional capital or pledging additional assets to secure the loan should all be considered when negotiating with the lender. Most borrowers today are not negotiating from strength so they should consider all such options.
3. Upfront Fees
The best way to combat an unexpected upfront fee is to have several lenders competing for your business and have thenm give you their offers in writing. Weeekly we hear of and see more banks selectively making loans so there is a good chance that there is a bank in your area which would be interested in discussing your needs. Also, keep in mind that all lenders require the borrower to pay for third party reports, title searchs and appraisals at loan closing.
For more questions on key points to remember when refinancing a commercial property mortgage, contact Ed Kearney of the commercial real estate West Palm Beach brokerage firm Kearney Commercial Realty/Sperry Van Ness online or call 561-616-6262.