The refinancing of commercial property often occurs for the same reason a person might refinance their home – to reduce high interest rates. The owner may also be looking into refinancing in order to obtain cash from the equity that has been built into the property over time. Regardless of the reason there are few points to remember if you are thinking of refinancing your commercial property.
1. Any capital obtained from the refinancing of the property should be reinvested in the property itself. Any other use of the cash and the interest paid on the new portion will not be tax deductible. This cash out amount will be considered a consumer debt if its use was found to be outside of the property and is therefore no longer tax deductible.
2. Because loans for commercial properties are typically much larger than those for residential properties, it will pay to consider the type of loan you have in depth before committing to a large loan that will take many years to repay. Compare your options for both fixed rate and variable rate loans. Does the variable rate loan have a cap? How many times is it expected to change? These details can often be inferred from the investment index that is linked to the rate. Be wary of any lender unwilling to discuss these details with you.
3. If you decide to refinance, check to see if the new loan has a due on sale clause. This clause works to the benefit of the lender in that it prevents the property from being sold without the approval of the lender.
4. Make sure you know what kind of paperwork will be involved. Professionally prepared stated income reports may be all you need for many types of commercial property, depending on the circumstances. Corporate tax returns, profit and loss statements, and balance sheets may not be required. In rare situations, full appraisals or environmental reports may be needed. The more complex the situation surrounding the refinancing, the more complex the required documentation may be.
5. Hefty penalties that must be paid off for pre payment of an existing fixed rate loan may prohibit some borrowers from refinancing. Check the details of your original loan to see if there are any pre payment penalties.
6. Interest rates on commercial real estate loans have reached as low as 5 percent for a 10 year term. Make sure you get the best rate you can if you decide to refinance. It may be best to lock in long term debt now – interest rates may or may not get any lower.
7. Consider selling if it is an option for you. Prime commercial real estate is a hot investment in many areas today. Test the market and see what kind of offers come back.
8.If your business is doing the refinancing of the building it occupies, acquiring a term loan may be an option. Term loans usually mature between one and ten years and can give small businesses the operating cash they need. |
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