Yes, you can refinance a commercial loan, and most owners do it at least once during the hold period to lock in a better rate, extend the amortization before a balloon comes due, or pull equity out of the property. Approval generally hinges 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 solid record of property income. From application to closing, plan on 60 to 120 days and total costs running 1 to 5 percent of the new loan amount.
When a Refinance Is Worth the Cost
Start with a break-even calculation. Add up every closing cost you’ll pay (origination, appraisal, legal, title, and any prepayment penalty on the existing loan), then divide by your projected monthly payment savings. The result is the number of months it takes for the lower payment to recover what the refinance cost you. If you plan to sell in two years and the break-even sits 30 months out, the deal loses money.
Rate savings aren’t the only reason to refinance. A balloon payment coming due, a desire to swap a variable rate for a fixed one, or enough built-up equity to pull cash out for improvements or acquisitions can all justify the transaction. Timing matters in the other direction too. Refinancing early in a loan’s life often triggers steep prepayment penalties that erase the interest savings. The closer you are to the original loan’s maturity, the smaller those penalties tend to be.
What Lenders Look For
Debt Service Coverage Ratio
The debt service coverage ratio is the single most important number in a commercial refinance application. It measures whether the property earns enough to cover the new mortgage payment, dividing net operating income by total annual debt service (principal plus interest).1JPMorgan Chase. How to Use the Debt Service Coverage Ratio in Real Estate A property generating $500,000 in net income against $400,000 in annual debt payments has a ratio of 1.25. Most lenders want to see at least 1.25, and some require 1.35 or higher for riskier property types.2SBA 7(a) Loans. What Is the Required Debt Service Coverage Ratio (DSCR) for SBA 7(a) Loans A lower ratio won’t automatically kill the deal, but it usually means higher rates or a demand for additional collateral.
Loan-to-Value Ratio
The loan-to-value ratio compares the requested loan amount to the property’s appraised market value. For most commercial assets, lenders cap this between 65 and 80 percent depending on property type. Office and retail buildings typically max out around 65 to 75 percent, while multifamily properties may qualify for up to 80 percent.3eCFR. Appendix A to Part 628 – Loan-to-Value Limits for High Volatility Commercial Real Estate Exposures A fresh appraisal sets the current value. If the property has lost value since you bought it, you may not have enough equity to meet these thresholds. That’s a common surprise for borrowers who haven’t had the property appraised recently.
Credit and Occupancy
Lenders pull personal and business credit on every guarantor. Scores in the 660 to 680 range are the floor at most conventional lenders; below that, you’re looking at hard-money or bridge options at much higher rates. Strong personal credit doesn’t rescue a weak property, though. For multi-tenant buildings, lenders typically want occupancy at or above 85 percent with a consistent leasing history. A half-empty office building signals the property may not sustain the new debt regardless of who owns it.
The Costs You’ll Pay
Prepayment Penalties on the Existing Loan
The largest line item is often the penalty for paying off the current loan early. Two structures dominate commercial lending.
Yield maintenance compensates the original lender for the interest income lost to an early payoff. It’s calculated by taking the present value of remaining loan payments, discounted at the current Treasury yield closest to your loan’s maturity date. When rates have dropped significantly since origination, yield maintenance gets expensive because the gap between your rate and current Treasury rates is wide. When rates have risen, the penalty shrinks or disappears.
Defeasance works differently. Instead of paying a penalty, you buy a portfolio of government bonds that replicates the exact cash flow your remaining loan payments would have delivered. The bonds replace the real estate as collateral, freeing the property for the new loan. Defeasance is common in CMBS loans and can be cheaper than yield maintenance when rates are falling, but it requires consultants, attorneys, and accountants, and the process can take months.
Some loans use simpler step-down penalties (5 percent in year one, 4 percent in year two, and so on), but yield maintenance and defeasance are far more common in larger deals. Model the prepayment cost before committing because it can easily exceed the savings from a lower rate.
Third-Party Reports
Commercial refinancing requires professional reports residential deals don’t. A commercial appraisal typically runs $2,000 to $10,000 depending on property size and complexity, with most in the $3,000 to $6,000 range. A Phase I environmental site assessment, which checks the property’s history for contamination risks, generally costs $1,800 to $3,500. If the Phase I flags a concern (a former gas station or dry cleaner on site, for example), a Phase II with soil and groundwater testing can add $6,000 to $25,000 or more. A property condition assessment, which evaluates the building’s physical state and estimates future capital needs, adds another $2,000 to $5,000.
Lender and Closing Fees
Loan 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 all land on the borrower at closing. If you use a commercial mortgage broker to shop the deal, expect a separate broker fee of 1 to 2 percent of the loan amount. Processing fees and credit report charges add a few hundred dollars more. Many of these costs can be rolled into the loan if there’s enough equity, but doing so grows the principal you’ll be paying interest on for years.
Recourse vs. Non-Recourse
How the loan is structured decides what’s at risk if the deal goes bad. With a recourse loan, the lender can pursue your personal assets to cover any shortfall after foreclosure. If you owe $2 million, the property sells for $1.5 million at auction, and the loan is recourse, 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; if the sale doesn’t cover the balance, the lender absorbs the loss.
Non-recourse sounds better, but there are trade-offs. Lenders compensate for the added risk by requiring lower loan-to-value ratios, often insisting the loan be over-collateralized. They also build in “bad boy” carve-outs that make the loan fully recourse if the borrower commits certain acts: filing for bankruptcy, committing fraud, diverting rental income, letting insurance lapse. These carve-outs are backed by a personal guaranty, so the non-recourse protection vanishes the moment one is triggered. CMBS (conduit) loans are almost always non-recourse with carve-outs. Local and regional banks tend to require full recourse.
Documentation to Pull Together
Lenders want a thorough picture of both the property and the borrower. Expect to provide at least two to three years of federal tax returns for the borrowing entity and every individual guarantor, year-to-date profit and loss statements showing current income tracks with historical performance, and a balance sheet detailing all business assets and liabilities.
On the property side, a certified rent roll is essential for any income-producing building. It lists every tenant, their monthly rent, lease start and expiration dates, and security deposits held. Lenders use it to verify that the income on your financial statements matches the lease contracts in place. You’ll also need proof of hazard and liability insurance.5Freddie Mac. Multifamily Seller/Servicer Guide – Chapter 31 – Insurance Requirements Round that out with updated UCC-1 financing statements for the new lender’s security interest, operating agreements identifying authorized signing members, and detailed property descriptions. Organizing everything digitally before you start cuts weeks off the process.
How the Process Runs
You submit the application and documents to the lender, who screens the deal against basic parameters before moving it into formal underwriting. The lender orders third-party reports (appraisal, Phase I environmental, often a property condition report), and an underwriter builds the full risk profile for the loan committee’s decision.
For multi-tenant properties, the lender will also request estoppel certificates from each tenant, which are signed statements confirming lease terms, rent, and whether tenants have any outstanding claims against the landlord.6house.gov. Estoppel Certificate A tenant who disputes the rent amount or reveals an unresolved maintenance claim can delay or derail the refinance, so communicating with tenants early helps.
Once the loan committee approves, the lender issues a commitment letter spelling out the final interest rate, loan amount, amortization schedule, and conditions that must be satisfied before closing. Read it carefully; the terms are hard to renegotiate later. At closing, a title company or attorney coordinates signing of the mortgage note and security deed. The new lender pays off the previous loan directly, the old lien is released, new UCC-1 statements are filed, and any remaining equity is released to the borrower. The full timeline runs 60 to 120 days, with complex deals or slow tenant estoppels pushing it longer.
SBA Options for Smaller Borrowers
If your business qualifies, SBA-backed loans offer refinancing with lower down payments and longer terms than conventional commercial mortgages. Two programs cover most situations.
SBA 7(a)
The 7(a) program is the SBA’s most flexible option, allowing refinancing of existing business debt up to $5 million.7U.S. Small Business Administration. 7(a) Loans The catch is that you must demonstrate you can’t get comparable terms from a conventional lender without the SBA guarantee. You’ll also need to show the business is creditworthy and can repay the loan. The SBA doesn’t lend directly; an approved bank originates and the SBA guarantees a portion, which reduces the bank’s risk and generally produces better rates and terms.
SBA 504
The 504 program is built for major fixed-asset financing, including commercial real estate refinances. Recent rule changes made it more accessible. Borrowers can now refinance up to 90 percent of the appraised value of their fixed assets, up from the previous 85 percent cap. The old requirement that refinancing a government-guaranteed loan produce at least a 10 percent reduction in monthly payments has been eliminated. To qualify, at least 75 percent of the original debt must have been used for commercial real estate or major equipment.8Federal Register. 504 Debt Refinancing You can also roll eligible business expenses into the refinance (salaries, rent, utilities, inventory purchases) as long as total financing stays within the 90 percent loan-to-value limit. The previous 20 percent cap on those operational costs has been removed.
Fixed or Variable Rate
Fixed rates stay the same for the entire loan term, which makes budgeting predictable and protects you if rates rise. The trade-off is that fixed rates are typically higher at origination than variable rates, and fixed-rate commercial loans almost always carry yield maintenance or defeasance provisions that make early payoff expensive.
Variable rates track a benchmark index and adjust periodically. They usually start lower, which can mean real savings if you plan to hold the loan for a short period or expect rates to stay flat or decline. The risk is obvious: if rates climb, your payments climb with them. For borrowers planning to sell or refinance again within a few years, variable rates often make sense. For long-term holders, a fixed rate buys certainty that’s worth the premium. Some lenders offer hybrid structures with a fixed period followed by variable adjustments.
Tax Treatment of the Refinance
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 fees, title fees, and legal costs, are typically deductible as well, though the timing rules vary.
Cash-out proceeds from a refinance are not taxable income. A loan creates a repayment obligation, so it’s not a gain. That makes cash-out refinancing an attractive way to tap equity without triggering the taxable event a sale would. You can only deduct interest on the portion of the refinanced loan used for business purposes, though. If you pull out $300,000 and use it for personal expenses, the interest on that portion isn’t deductible as a business expense. Work with a tax professional on the allocation because mixed-use loan proceeds draw IRS scrutiny.