Yes, you can refinance a commercial loan, and most owners do it to lower the interest rate, restructure a schedule with a looming balloon, or pull equity out of the property. Approval generally turns on three numbers: a debt service coverage ratio of at least 1.25, a loan-to-value ratio no higher than about 75 percent, and a documented income history on the property. Plan on 60 to 120 days from application to closing, and costs running 1 to 5 percent of the loan amount depending on size and complexity.
When a Refinance Is Worth Doing
A lower rate on its own doesn’t justify the expense. Run a break-even: add up origination, appraisal, legal, title, and any prepayment penalty, then divide by your monthly payment savings. If you’ll hold the property well past that break-even month, the refinance pays for itself. If you plan to sell in two years and break-even sits 30 months out, you lose money on the deal.
Rate savings aren’t the only reason to refinance. A balloon payment approaching maturity, a desire to move from a variable rate to a fixed one, or enough built-up equity to fund improvements or another acquisition are all common triggers. Timing inside the existing loan matters too. Refinancing early often triggers steep prepayment penalties that can wipe out any interest savings; the closer you are to the original maturity, the smaller those penalties tend to be.
Eligibility: What Lenders Look At
Debt Service Coverage Ratio
DSCR is the single most important number in the file. It measures whether the property earns enough to cover the new payments, dividing net operating income by total annual debt service.1JPMorgan Chase. How to Use the Debt Service Coverage Ratio in Real Estate A property producing $500,000 in net income against $400,000 in annual debt payments hits 1.25. Most lenders want at least that, and some require 1.35 or higher on riskier property types.2SBA 7(a) Loans. What Is the Required Debt Service Coverage Ratio (DSCR) for SBA 7(a) Loans A ratio below the threshold doesn’t automatically kill the deal, but it usually means a higher rate or additional collateral.
Loan-to-Value Ratio
LTV compares the requested loan to the property’s appraised value. Lenders typically cap it between 65 and 80 percent, with office and retail closer to 65 to 75 percent and multifamily sometimes reaching 80 percent.3eCFR. Appendix A to Part 628 – Loan-to-Value Limits for High Volatility Commercial Real Estate Exposures A fresh appraisal drives the number. If the property has lost value since you bought it, you may not have the equity to clear these thresholds, which is a common surprise for owners who haven’t ordered an appraisal in years.
Credit and Occupancy
Lenders review personal and business credit for every guarantor. Scores in the 660 to 680 range are the floor for most conventional lenders; below that, you’re looking at hard-money or bridge lending at materially higher rates. Strong personal credit does not rescue a weak property. For multi-tenant buildings, lenders generally want occupancy at 85 percent or better with a consistent leasing history. A half-empty office building signals the property may not sustain the new debt regardless of who owns it.
Recourse vs. Non-Recourse
Structure decides what’s at risk if the deal goes sideways. With a recourse loan, the lender can pursue your personal assets for any shortfall after foreclosure. Owe $2 million, watch the property sell for $1.5 million at auction, and you’re personally on the hook for the remaining $500,000 plus legal costs. With a non-recourse loan, the lender’s recovery is limited to the property itself.
Non-recourse sounds cleaner, and it comes with trade-offs. Lenders offset the added risk with lower LTV caps, often insisting the loan be over-collateralized. They also write in “bad boy” carve-outs that flip the loan back to full recourse if the borrower files for bankruptcy, commits fraud, diverts rental income, or lets the insurance lapse. Those carve-outs are backed by a personal guaranty, so the protection evaporates the moment you trip one. CMBS (conduit) loans are almost always non-recourse with carve-outs; local and regional banks tend to require full recourse.
What It Costs to Refinance
Prepayment Penalties
The largest single cost is often the prepayment penalty on your existing loan. Two structures dominate commercial lending.
Yield maintenance compensates the original lender for the interest income they lose when you pay off early. It’s calculated using the present value of remaining loan payments discounted at the current Treasury yield closest to your loan’s maturity. When rates have dropped sharply since origination, yield maintenance can be very expensive because the gap between your loan rate and current Treasury rates is wide. When rates have risen, the penalty shrinks or disappears.
Defeasance replaces the penalty with a portfolio of government bonds that replicate the exact cash flow your remaining payments would have delivered to the lender. The bonds take the place of the real estate as collateral, freeing the property for the new loan. It’s common on CMBS loans and can be cheaper than yield maintenance when rates are falling, but it takes consultants, attorneys, and accountants, and the process can run months.
Some loans use simpler step-down penalties, such as 5 percent in year one, 4 percent in year two, and so on. Whatever structure applies, model the prepayment cost before committing. It can easily exceed the savings from a lower rate.
Third-Party Reports
Commercial deals require reports residential refinances don’t. A commercial appraisal typically runs $2,000 to $10,000, with most falling between $3,000 and $6,000. A Phase I environmental site assessment, which reviews the property’s history for contamination risk, generally costs $1,800 to $3,500. If the Phase I flags a concern, say a former gas station or dry cleaner on the site, a Phase II with soil and groundwater testing can add $6,000 to $25,000 or more. A property condition assessment on the building’s physical state adds another $2,000 to $5,000.
Lender and Closing Fees
Origination fees typically range from 0.5 to 1 percent of the loan amount.4Cornell Law School. Origination Fee On a $2 million refinance, that’s $10,000 to $20,000. Title insurance, the lender’s legal fees, and recording charges are additional. A commercial mortgage broker shopping the deal typically charges 1 to 2 percent of the loan amount on top of that. Processing fees and credit reports add a few hundred more. Many of these costs can be rolled into the loan if you have the equity, but you’ll pay interest on them for years.
SBA Programs for Smaller Borrowers
If your business qualifies, SBA-backed loans offer refinancing with lower down payments and longer terms than conventional commercial mortgages.
SBA 7(a)
The 7(a) program is the SBA’s most flexible option and allows refinancing of existing business debt up to $5 million.5U.S. Small Business Administration. 7(a) Loans The catch: you have to show you can’t get comparable terms from a conventional lender without the SBA guarantee, and the business has to be creditworthy with a reasonable ability to repay. The SBA doesn’t lend directly. An approved bank originates and the SBA guarantees a portion, which lowers the bank’s risk and typically improves rates and terms.
SBA 504
The 504 program is built for major fixed-asset financing, including refinancing commercial real estate. Recent rule changes have widened access. Borrowers can now refinance up to 90 percent of the appraised value of fixed assets, up from 85 percent. The prior requirement that refinancing a government-guaranteed loan produce at least a 10 percent reduction in monthly payments has been eliminated. At least 75 percent of the original debt must have been used for commercial real estate or major equipment.6Federal Register. 504 Debt Refinancing
A useful feature of the 504: you can roll eligible business expenses into the refinance, including salaries, rent, utilities, and inventory purchases, so long as total financing stays inside the 90 percent LTV limit. The previous 20 percent cap on operational costs has been removed.
Documents and Process
Lenders want a full picture of the property and the borrower. Expect two to three years of federal tax returns for the borrowing entity and every individual guarantor, year-to-date profit and loss statements, and a business balance sheet. For income-producing property, a certified rent roll listing every tenant, monthly rent, lease dates, and security deposits is essential. Add proof of hazard and liability insurance.7Freddie Mac. Multifamily Seller/Servicer Guide – Chapter 31 – Insurance Requirements Updated UCC-1 financing statements, operating agreements identifying authorized signers, and detailed property descriptions round out the package.
Once you apply, an analyst does a fit check before the file moves into formal underwriting. The lender orders a commercial appraisal, a Phase I environmental report, and often a property condition assessment. For multi-tenant properties, the lender will also require estoppel certificates from tenants confirming their lease terms and any outstanding claims.8house.gov. Estoppel Certificate Disputes at that stage can delay or derail a deal, so contact tenants early.
If loan committee approves, the lender issues a commitment letter with the final rate, loan amount, amortization, and conditions to closing. Read it closely. Terms are hard to renegotiate after signing. At closing, a title company or attorney handles the note and security deed, the new lender pays off the old one, the previous lien is released, and any equity left after payoff and closing costs goes to you. Total timeline from application to funding usually lands between 60 and 120 days.
Fixed vs. Variable Rate
Fixed rates stay level for the loan term, which makes budgeting predictable and protects you if rates rise. They typically price higher at origination than variable rates and almost always come with yield maintenance or defeasance provisions that make early payoff expensive.
Variable rates tie to a benchmark index and adjust periodically. They usually start lower, which can save money if you plan to hold the loan for a short period or expect rates to hold flat or fall. If rates climb, payments climb with them. For owners planning to sell or refinance again in a few years, variable often makes sense. For long-term holds, the fixed-rate premium buys certainty. Some lenders offer hybrids with a fixed period followed by variable adjustments.
Tax Treatment
Closing costs and origination fees on a commercial refinance generally can’t be deducted in full the year you pay them. The IRS requires you to amortize loan origination points over the life of the new loan. Pay $15,000 in points on a 10-year refinance, and you deduct $1,500 per year. Other closing costs on investment and rental property, including appraisal, title, and legal fees, are typically deductible, though timing rules vary.
Cash-out proceeds are not taxable income. A loan creates a repayment obligation, so it isn’t a gain, which makes cash-out refinancing an attractive way to access equity without triggering a taxable event the way a sale would. Interest is deductible only on the portion of the loan used for business purposes. Pull out $300,000 and spend it on personal expenses, and the interest on that portion is not a business deduction. The IRS scrutinizes mixed-use proceeds, so work the allocation with a tax professional before you spend.