Cash Out Commercial Refinance, There’s Now an Alternative.
If you have recently received a Letter of Intent or a “pre approval” from a lender regarding a cash out refinance on your commercial property, you don’t need me to explain the pitfalls. Upfront appraisal fees (at $3000 - $5000), environmental fees ($2000), start off an often expensive and “brain numbing” process to fund your commercial loan.
If you are seeking to pull cash out of your commercial property, there’s now a better way. The commercial equity loan also called a commercial real estate line of credit “sits” in second lien position behind any first mortgage that you already have in place. So, you potentially do not need to refinance your existing first commercial loan…
This is especially true if your sole goal is to simply pull cash out of your property and you do not want to touch your existing loan. Perhaps your existing rate is better than market or you have a high prepayment penalty or you do not want to incur the closing costs associated with a new traditional loan, etc. In any case, the commercial equity line eliminates many negatives. For example, there are no upfront fees or upfront third party fees, like appraisal, title, or environmental. The bank essentially uses a comprehensive software program for these reports. For instance, the bank uses a computerized, broker opinion of value, rather than an appraisal to determine a commercial properties value.
Closing costs consist of a 1% fee to the lender and an origination fee to the broker, paid out of the line, at closing. So, you could literally have no out of pocket cash into the loan. Also the prepayment penalties are virtually nonexistent at $1,500 in the first three years, compared to 5-10% of the outstanding loan balance on a typical commercial loan. Plus you only pay interest on what you borrow, rather than the alternative of cashing out a lump sum and paying interest on money you may not be using.
However the commercial equity line is not perfect. Drawbacks include a relatively low loan amount, its capped at $500,000. Underwriting is strict with both the borrower credit scores (need to be above 660) and the Combined Loan to Value (Needs to be under 75%).
In addition, although very common with lines, the loan is based off an adjustable rate, which is tied to Prime.
All in all this is an excellent option, especially for owners that are seeking a way to unlock their commercial equity and not go through the expense and “brain damage” of a traditional commercial loan.
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