Refinance commercial loan ?

Question

I purchased a commercial building in December of last year and it was 75% occupied (25% vacant area). In the last 3 months, I have invested some money to make improvements to the property, especially the cosmetic look as well as some deferred maintenance.  These improvements are now paying off, as I just signed 2 new leases to fill 3/4 of the remaining vacant spots.

I have a few potential tenants now looking at the remaining vacancy and I hope to have it leased by May-June timeframe at the latest. Most of the existing leases have between 3-5 years to run. One of the new ones was signed for 7 years at very competitive rate with yearly escalations.

Prior to purchasing the property, the PCA (Property Condition Assessment) had revealed some issues with the roof and some of the HVACs units (there are 24 total) were 15+ years old. So, I'm planning to address those issues in the second half of the year, if they don't break up before that.

I thought about approaching the lender and ask them to refinance the loan, given the new leases in place (or to be in place soon) and use some of the cash to perform the major improvements. The roof will cost between $40-50k and 3-4 HVAC units will most likely be close to $15k. The current loan terms are 4.5%, 5 year balloon, 20 years Amortization. I purchased it at about a 7 CAP on purchase of this commercial property.

My main question is if there is any type of rules in place that prevents me from cash-out refinancing 6 months into the commercial loan?  Can I refinance anytime I want? Would there be any advantages to talk to the same lender or to approach different lenders? Any input welcome ...

Jeff Greenberg · Answer

This would depend on the lender and the conditions set in the existing loan. In general there are no set rules, except what was in the existing loan. Read the contract and talk to you lender. All they can do is say no.

I will say that all of this should have been planned out ahead of time. Not after the fact.

Good luck with this venture.

I will say that all of this should have been planned out ahead of time. Not after the fact.

Good luck with this venture.

Henri Meli · Answer

Account Closed . Thanks for your input. I believe a new appraisal will be needed, because If I manage to get the place leased at close to 100% with very good leases (3-5 years), this should get the overall value to increase significantly. When I bought it, it was occupied at 75%.

Once the leases have been signed, I'm planning to reach out to the current lender to get their thoughts on my plans.

Account Closed · Answer

It might be very expensive to get that cash out of your property because the lender will want a new appraisal, title, escrow, and the origination fees--plus your prepayment penalty. You can avoid many of these costs by going to the lender who holds your paper right now and negotiating some of these fees out. I've been successful getting lenders to get rid of the prepays--sometimes 50% and sometimes 100%.

Account Closed · Answer

Have you considered a line of credit? TD have a strong offering, up to 75% LTV with low fees and no seasoning if renovations are extensive enough. If you have good equity from purchase or you believe the value has increased sufficiently after the work completed, it could be an avenue to explore.

Henri Meli · Answer

Thanks Account Closed . I will look into this new option.

Mike Dymski · Answer

Hey, I did the same thing.  Sometimes, you just have to jump in, roll with the punches and pivot with the next one.  The value add mitigates risk and provides a lot of exit options.  You have some of the hard parts covered...buying and managing right and can layer in improved financing as you grow.  Well done.

Henri Meli · Answer

Thanks @Mike Dymski . This was my very first commercial loan. So, I wasn't thinking that far yet ...

Mike Dymski · Answer

Hey Henri.  Yes, your current or other lenders would likely be willing to refinance, as other have mentioned.

On the next one, consider setting up the original loan structure to match your strategy.  This would be in the best interest for both you and the lender so the property does not find itself in the position where it lacks the capital to operate most effectively.  You could get a construction/perm product where the improvements are funded in the original loan.  Some lenders also can include a future advance clause where you can cash out some of the value add after 1 year without a refinance and re-appraisal (the original appraisal includes the ARV).

Well done on the purchase and value add.

Henri Meli · Answer

Thanks a lot @Stephanie Potter and @Derek Carroll for this enlightenment of the commercial loan space. It makes me feel better to actually know that i can get money, under certain conditions.

The thing is, as an investor, you never stay "idle". My ears are always open for new opportunities and if I sniff an opportunity on the horizon, I want to make sure I know there is a way for me to get to it. Of course the condition / the price to pay will vary.

Refinance commercial loan ?

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