Should I Refinance My Commercial Space?
November 23, 2022
Refinancing commercial real estate is commonly undertaken for many reasons, including to increase cash flow, secure more short or long-term favorable loan terms, or as a way to increase the value of the commercial space on paper. It can represent an opportunity for property owners to realize significant ownership benefits. However, given recent Federal Reserve interest rate hikes and the potential for more looming on the horizon, many commercial property owners are likely wondering if now is the wrong time to refinance.
Has the ship sailed for commercial property refinancing for the foreseeable future? What about the benefits and drawbacks of commercial space relocation in the current economic environment? In light of the general unease dominating economic outlooks, commercial property owners should weigh the impact of rising rates against the opportunity costs of putting off refinancing.
Commercial Refinance for Cash Flow
Commercial loans generally include terms that require a balloon payment when the loan matures. That balloon payment typically represents most of the loan’s original principal. It is likely to severely impact the overall cash flow for the property owner when it comes due. Refinancing can amortize a loan period further into the future, pushing out a pending balloon payment to increase immediate cash flow and potentially increase the return on the property investment over time.
Commercial Refinance for Liquidity
Refinancing is an opportunity to increase liquidity to make improvements, expand a business, or even invest in another property. Cash-out refinancing options are often a great way to access equity and invest in things designed to boost business revenue. Successful high-net-worth investors keep their money moving. Using a cash-out to build up cash-on-hand reserves increases can increase readiness to take advantage of opportunities to improve positions for a company or property investment.
Loan Terms and Rates
Historically, rates under 7% are very fair, so many property owners may benefit from a refinance even with rising rates. Commercial real estate owners that received bridge loans, hard money loans, or loans from an owner carry back may be among refinance beneficiaries. Property owners with a loan tied to the Prime rate also may want to refinance to a fixed rate as rates rise.
Commercial Space Relocation
Alongside rates, commercial space values have also been trending upward. Higher property values may benefit owners who receive new valuations and successfully sell, but what does it mean for relocation? When considering a move, it is important to determine the value propositions.
Does the move put the business closer to a critical supplier or high-value client that might tangibly benefit the business? Does the move place the company in a more desirable, less costly, or otherwise beneficial location for the owner, employees, or customers? Balance sheet impacts are critical, but sometimes a relatively higher relocation sales price is worth the intangible benefits to the company.
Is Now the Time to Refinance?
Rising interest rates are expected over the next year and may slow real estate value appreciation and potentially make carrying debt more costly. Refinancing is still an option to realize capital opportunities and, in many cases, lower interest rates and improve loan terms.
If your real estate loan matures over the next couple of years, now may be the time to refinance. First Western Trust helps business and real estate owners explore financing options, secure favorable terms, and manage the process from start to finish. If you have questions, our experts can help make sense of the cost-benefit analysis for your commercial real estate refinancing.