Commercial Cash Out Refinance

[Pete Bell]

Hello - new to the site, but have been lurking for a year or so.

I am the owner of a corporation that holds a somewhat sizable commercial office property which has been within the family for more than 6 decades. Historically, vacancy has been maintained well under 10%, generally between 0% and 8% and is currently at 7% (one single suite). It is in what is considered a boutique market. 

It has been about a decade since our last appraisal, which came in around $5 million when the market was much softer. Our current balance on the fully-amortizing commercial mortgage is just under $600k with a perfect payment history. Gross revenue for the property is around $700,000, and all tenants (about 50) are on 1-4 year gross & modified gross leases. I am a owner/operator and other than a modest salary, I re-invest 100% of what is left into the continuous maintenance and improvements to the property. 

I would like to do a cash out refinance for $1.2 million ($600k cash back) for purposes of some completing some common area renovations that are larger than we can complete by dipping into monthly cashflow, renovating our only vacant space, and cleaning up a tax debt (feds, not property tax) that unfortunately built up due to large unexpected repairs having to come out of cashflow.

I would also like to obtain a $100k commercial equity line of credit for normalizing our cash flow when these larger unexpected repairs come up in the future (emergency AC unit replacements, boiler repairs, expensive elevator repairs, etc). We have never operated with a line of credit, we have operated for decades by just paying for upgrades and repairs, big or small, with our monthly receivables. When the bigger ticket items come up, this can admittedly make things challenging. The upside to this is that our LTV is extremely low.

I am inquiring about what a bank will be looking for to do a deal like this. While we have an excellent LTV, I want to understand the feasibility of it, limitations on what the money can be used for (paying taxes) and just what to expect/look out for.

Thank you for any input!

[Salvatore Lentini]

Hi @Nick Rutkowski - refinancing for such a small LTV is not worth it in my opinion. There are inherent costs (money and time) to refinancing so I would either figure out a way to do a smaller amount (do the rehab in phases using a small amount of refi money and then casflow after that) or do an LOC. That way you can pay it back quickly and you're not locking yourself into a long term loan. Or refinance more and use the extra funds to improve the property further to increase cashflow or acquire other properties to increase your global cashflow.