Commercial Refinance Closings2018-07-17T17:30:09-04:00

Commercial Refinance Closings

Commercial loans typically mature (become due and payable in full) in 5 to 10 years.  This is much sooner than the average residential loan, which typically matures in 30 years.  This means it will not be long, relatively speaking, before the business owner must either pay off the mortgage loan or pursue commercial refinancing.

Commercial Refinance Closings: Potential Benefits

There can be significant advantages to refinancing. It keeps an investor’s money from being tied up with a piece of property. The cash he/she obtains from the refinance is tax-free and may be  used to pay for improvements and renovations to the commercial real estate, or it may be used to purchase a different piece of real estate altogether.

As a general rule, lending institutions give no more than 75% Loan to Value (LTV) on a business loan for commercial refinancing. LTV is the ratio of a loan to the value of the asset purchased.  It is the ratio of the first mortgage loan as a percentage of the appraised value of the real estate.  Consequently, commercial refinancing closings throughout North Florida often provide a way to borrow money and get low-interest rates and generally favorable mortgage terms. The same is true for closings in South Florida as well as Central Florida.

Are you in the process of refinancing your current home? Do you need help with home title services? If you have any questions or needs, contact our Attorneys to find out how we can help you easily navigate the real estate purchasing/mortgage process and how we can provide you with the peace of mind you deserve. True Title is a company setting a standard of excellence industry-wide. We at True Title have been committed to excellence in customer service since 1998.

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Commercial Refinance Closings: How Lenders Decide

It is important to realize, though, that even if obtaining the original commercial loan seemed relatively easy, getting to a successful commercial refinance closing may not. This is especially likely to be the case if the amount of profit the business is generating has changed for the worse.

Specifically, lenders examine the business’ Net Operating Income (NOI) when deciding whether a commercial mortgage loan may be refinanced with a business loan.  NOI is determined by adding up all of the income from the commercial property and then subtracting the necessary business expenses.

Lenders also look at the debt ratio, a comparison of the monthly payment to the amount of money generated by the business per month in income. The debt ratio serves as an indicator of the borrower’s ability to repay the commercial loan and is a key part of determining the rates and terms for commercial refinancing closings.

Finally, a lending institution considers the debt service coverage ratio. This is annual NOI divided by the number of loan payments in a year. Generally speaking, this number should be 125 or less.

A high, stable NOI means the property is more valuable, and accordingly lenders are more likely to provide a commercial loan to refinance the property. Conversely, if the NOI is low or simply declining, a lending institution is less likely to offer a business loan. In this instance, the lender will typically see the commercial loan as a risky proposition.

Commercial Refinance Closings: The Complexities

Even if the bank or other lender is willing to provide a business loan for the purpose of refinancing, the process of getting to the commercial refinance closing will likely be more complicated than the process of obtaining the original commercial mortgage.

First, the commercial refinance will require an extensive title search. A title search is a historical examination of all records related to the ownership and encumbrance of the property in the county where the property is located. The primary objective of the title search is to establish beyond any doubt who legally owns the real estate and to discover any liens, claims and/or encumbrances that attach to the property.  Under Florida’s Marketable Record Title Act (MRTA), a title search for a residential transaction is required to cover at least 30 years in the history of the property. When it is in the service of a commercial refinance closing, most lenders require a 40-60 year title search of the property’s history to determine title (ownership) and encumbrances.

Another part of the process is verifying the identities of the parties involved. In a residential real estate sale, this is often straightforward. The buyer and seller are individuals who can readily produce their driver’s licenses or other official identification. In the case of a commercial refinance closing, though, the parties are often Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), or corporations formed for the purpose of owning real estate.  This means the title company must verify that the parties who purport to act on behalf of the business entity relative to the instant transaction are indeed authorized to do so by the entity.

Making the process even more complicated, there are often more parties involved in commercial refinancing closings than there are with a residential transaction, and they must all have their bona fides established.

Getting to the commercial refinance closing also requires consultation with surveyors, the Secretary of State/Division of Corporations, and zoning authorities, among other entities. Only after this is done can the business loan be approved.

Because of the high level of complexity, commercial refinancing closings generally takes 45-60 days. This may seem like a long time, but borrowers can expedite the process as much as possible by being prepared to do all that will be required of them.

How to be Prepared for Commercial Refinance Closings

Documents a commercial borrower will typically be required to produce to the commercial lender are:  1)  3 most recent years’ tax returns – both personal and business; 2)  Extensions for any filings – if applicable; 3)  3 months’ most recent bank statements – both personal and business; 4)  Personal financial statements – updated within last 60 days; 5)  Year-to-date business operating statements – if applicable; 6)  Year-end business operating statements if business tax returns are on extension; 7) Personal resume – required for investment properties if self-managed; 8) Property management resume, or letter of credentials, if property is professionally managed; 9) Letter of explanation for any derogatory credit, including: slow pays, charge-offs, liens, judgments, child support, etc.; 10) Schedule of real estate holdings – including purchase date, purchase price, and current mortgage amount; 11) Subject property rent roll – if not 100% owner occupied – if property is owner occupied and held in a different entity, i.e. LLC, and leased back to the business, then rent roll and copy of the lease must be provided; 12) Subject property leases – see above for owner occupied property; 13)  Subject property income and expense statements, profit and loss statements, and balance sheets, including year-end and year-to-date; 14)  and for investment property with single or anchor tenants, include tenant financial statements.

Commercial borrowers also must produce articles of incorporation, articles of organization (for LLCs), bylaws, charters, partnership agreements (general or limited), operating agreements, and resolutions authorizing a Corporate/LLC/Partnership representative to engage in the commercial transaction.

Finally, borrowers must decide how to structure the business loan for their Florida based property. It may be desirable to create a new business entity, or it may be preferable to keep the commercial loan under the current business umbrella. Borrowers generally make this decision in consultation with an attorney and/or title agent such as those employed by True Title, your Florida title insurance company. 

Are you in the process of refinancing your current home? Do you need help with home title services? If you have any questions or needs, contact our Attorneys to find out how we can help you easily navigate the real estate purchasing/mortgage process and how we can provide you with the peace of mind you deserve. True Title is a company setting a standard of excellence industry-wide. We at True Title have been committed to excellence in customer service since 1998.

Contact Us

Commercial Refinance Closings: The Process

Once the process of a commercial refinance closing actually begins, the first step will be to choose a lender.  Naturally, this should be one the borrower trusts, but it is important to know there may be several commercial lenders from which to choose, and their terms may vary significantly. By shopping around, the borrower can find the most favorable terms.

Thereafter, the borrower chooses a title company.  The lender may offer to take care of that task, but the borrower must know that it is his/her legal right to select the title company of his/her choosing.  True Title is ready, willing and able to work for you and to make this process as simple and easy as possible.

The borrower then provides contact information and permission for the lending institution and the title company to contact his or her attorney and Certified Public Accountant (CPA), who typically assists the borrower in producing all of the documents referenced above.

The borrower also provides the lender and your Florida title insurance company with a copy of the purchase contract, proof of insurance, a Certificate of Good Standing from the Secretary of State/Division of Corporations, his/her personal identification (typically a driver’s license or other form of authorized picture identification), and all other documents referenced above.

The borrower must also pay for an appraisal.  The commercial appraisal will cost several thousand dollars, depending upon the size and complexity of the commercial property, and the appraisal must show that there is enough equity in the property to make the loan a desirable proposition from the lender’s perspective.

Occasionally the appraisal will seem inaccurate, perhaps because the lender brought in an appraiser unfamiliar with the area.  If the borrower believes the appraisal is inaccurate, he/she may take steps necessary to fix the problem, but this naturally lengthens the time necessary to complete the commercial refinance closing.

The borrower will also have to pay for inspections, origination fees, and closing costs.

Additionally, the lender may require a personal guarantee on the business loan. This means one or more of the primary owners is required to pledge personal property to secure the loan.  Lending institutions are particularly likely to require this if business profits are marginal.

When Commercial Refinance Closings Are Not a Good Idea

As the commercial refinance transaction/closing proceeds, it is important for the borrower to pay attention to fees and closing costs. If these are too high, he/she may ultimately pay more than the money he/she will receive from the transaction.  The interest rates and other commercial mortgage terms may be overly burdensome for the business from a financial perspective.  In such circumstances, obviously, the commercial refinance transaction is not benefiting the commercial borrower, and he/she should not pursue it further.

It is also important for the borrower to understand that the new mortgage perfected through the commercial refinance transaction will now take longer to pay off than the original mortgage encumbers the property.  If property prices fall in the meantime, this can make it difficult to sell the commercial property, especially if the value of the property falls below the principal balance of the commercial mortgage.

The highly qualified staff at True Title, your Florida title insurance company, is eager to assist you with this process.  Give us a call now so we can get started with your personalized options for commercial refinancing closings– (877) 785-8792.