We are often are asked when is the optimal time to refinance a commercial real estate loan. Many factors such as market interest rates, prepayment penalties, existing loan terms and the overall goals of the borrower come into play. There are however no set answers, but below are some real world thoughts on how you might analyze your own commercial refinance.
Traditionally, the analysis to keep an existing loan in place or to refinance into a new commercial loan can become very complex. Money Management Podcast advisors like to use the Discounted Cash Flow method which essentially compares the two loans on the Net Present Value basis.
We have found though, that most commercial building owners are primarily interested in how the proposed loan will:
1. Affect their monthly cash flow.
2. What the closing costs will be and how these costs will affect their equity.
3. What the out of pockets costs will be.
4. How long will it take for the increase in cash flow to “pay back” the owner.
Principal pay down is obviously another important component of any commercial loan. However, for most owners, especially those with highly leveraged properties, cash flow is more pressing than above. This is due to the relative high debt payment versus net cash after all the expenses have been paid.