Commercial mortgage refinancing replaces your existing loan with a new one, usually to lock in a lower rate, pull cash from built-up equity, or restructure the debt before it matures. Most lenders expect a debt service coverage ratio of at least 1.25, a loan-to-value ratio at or below 80%, and stable occupancy before they’ll approve. Closing costs commonly run 1% to 3% of the loan amount, and the process takes roughly 45 to 90 days from application to funding, not counting whatever it costs to exit your current loan.
What Lenders Need to See to Approve You
Three numbers do most of the work in underwriting. The first is the debt service coverage ratio, which measures whether the property’s net operating income covers the annual mortgage payments with room to spare. Divide NOI by total annual debt service; a DSCR of 1.25 means the property earns 25% more than the loan payments require. That 1.25 figure is the floor Fannie Mae and Freddie Mac set for fixed-rate multifamily loans, and most conventional lenders apply a similar standard across property types.1Fannie Mae. Conventional Properties2Freddie Mac. Q4 2025 Securitization Overview Assisted living and hospitality properties often face stricter requirements in the 1.40 to 1.50 range because their income is less predictable.
Loan-to-value is the second number. Agency programs cap multifamily at 80%, and conventional lenders rarely exceed 75% on office, retail, or industrial.1Fannie Mae. Conventional Properties Hotels and single-tenant retail get pushed lower still. Federal banking regulators publish supervisory ceilings that go higher than this, but in practice lenders underwrite well below them.3Office of the Comptroller of the Currency. Commercial Real Estate Lending Comptrollers Handbook
Occupancy is the third. A property running below 90% full raises questions about whether the income supporting the loan is stable. Most lenders want to see occupancy at or above that level for at least 90 days before funding.
On the borrower side, expect credit scores above 680 and a clean history with no recent foreclosures or bankruptcies. Individual lenders vary, but these are the standard expectations.
How Your New Rate Gets Built
Commercial mortgage rates aren’t a single published number. Your rate is a benchmark index plus a spread that reflects the deal’s risk. Fixed-rate loans are typically priced off Treasury yields, so a 10-year fixed starts with the 10-year Treasury constant maturity yield and adds a spread for property type, leverage, and credit quality. Floating-rate loans are generally tied to the Secured Overnight Financing Rate or, for some bank loans, the prime rate. As of late April 2026, the bank prime rate was 6.75% and the effective federal funds rate was 3.64%.4Federal Reserve Board. H.15 Selected Interest Rates Daily
The spread varies widely. A stabilized multifamily property with strong sponsorship might see 150 to 200 basis points over the index. A value-add retail property could price 300 basis points or more above it.
One structural choice shapes both your rate and your personal exposure: recourse versus non-recourse. A recourse loan puts you personally on the hook if the property’s income can’t cover the debt. A non-recourse loan limits the lender’s recovery to the property itself, with one important caveat. Virtually every non-recourse loan includes carve-out provisions, sometimes called “bad boy” guarantees, that convert the loan to full recourse if you commit fraud, misapply funds, transfer the property without authorization, or file bankruptcy. Non-recourse loans generally carry slightly higher rates, or require lower leverage, to compensate the lender.
What It Costs to Exit Your Current Loan
Refinancing plans stall here more often than anywhere else. Before you run numbers on a new loan, check what it costs to leave the one you have. Commercial mortgages almost always carry prepayment restrictions, and the penalty structure varies dramatically by lender.
Bank and credit union loans most often use a step-down penalty. A typical 10-year loan might carry a 5-4-3-2-1 structure: 5% of the outstanding balance if you prepay in year one, 4% in year two, dropping to 1% in year five and disappearing after that. Shorter-term loans use compressed versions like 3-2-1. Many loans also include an open window during the last 90 to 180 days of the term when you can prepay with no penalty at all. If your loan is in that window, the timing is working for you.
Securitized loans and many agency loans use yield maintenance instead. This penalty is designed to make the lender whole for the interest they would have earned over the remaining term. The calculation compares your current loan rate to the Treasury yield for a security with a matching remaining term, then takes the present value of that rate difference across the remaining payments. In a falling-rate environment, yield maintenance penalties can be enormous. When rates are rising, the penalty shrinks and often hits its floor, usually 1% of the balance.
The most complex exit is defeasance, found primarily in CMBS loans. Instead of paying off the loan, you buy a portfolio of government bonds that replicates the remaining payment schedule and swap those bonds in as substitute collateral. The property gets released and a successor entity carries the bond-backed debt to maturity. Defeasance costs rise and fall with bond prices, and legal and advisory fees typically add $50,000 to $75,000 on top of the bonds themselves.
Documents to Have Ready
A complete application package is what separates a 45-day close from a 90-day one. The rent roll is the starting point. It lists every tenant, their unit or suite, square footage, monthly rent, lease start and expiration, and any outstanding balances. Lenders cross-check the rent roll against actual bank deposits, so the numbers have to match.
Alongside the rent roll, expect to produce two to three years of profit and loss statements broken out by revenue source, with operating expenses itemized: property taxes, insurance, utilities, management fees, maintenance. Federal tax returns for the property-owning entity and for any individual guarantors verify the reported income.
Most lenders also require tenant estoppel certificates from major tenants. An estoppel is a signed statement from the tenant confirming the lease terms the landlord has represented: current rent, whether payments are current, and whether the tenant has any outstanding claims. These protect the lender from finding out after closing that a tenant disputes the lease or was promised concessions the borrower didn’t disclose.
You’ll also complete the lender’s formal application covering total assets, liabilities, liquid reserves, and any existing liens or pending litigation on the property. Organizing all of this in a digital data room before you approach a lender cuts weeks off the timeline. Each round of back-and-forth with underwriting adds delay.
Timeline From Application to Funding
A realistic timeline is 45 to 90 days. Simple deals with clean financials and cooperative tenants close faster. Larger or more complex properties with environmental concerns, multiple tenants, or partnership structures push toward the longer end.
Underwriting comes first. The lender’s team reviews the package, stress-tests the income projections, and verifies DSCR and LTV under both current and downside scenarios. Expect multiple rounds of questions. Minor discrepancies between the rent roll, P&Ls, and tax returns will get flagged.
While underwriting runs, the lender orders third-party reports. A professional appraisal establishes current market value and anchors the LTV calculation. Separately, the lender requires a Phase I Environmental Site Assessment under the ASTM E1527-21 standard, which reviews historical records, regulatory databases, and includes a physical site inspection to identify recognized environmental conditions such as the presence or likely presence of hazardous substances.5Fannie Mae. Environmental Due Diligence Requirements If the Phase I turns up potential contamination, a Phase II study with soil or groundwater sampling becomes necessary before the lender proceeds.
Once underwriting signs off and the reports come back clean, the loan moves to closing. The lender’s counsel prepares the loan agreement, promissory note, and mortgage or deed of trust. You sign, the new lender disburses funds to pay off the existing balance, and the old lender issues a lien release that gets recorded with the county to clear title for the new loan.
Closing Costs to Budget For
Closing costs on a commercial refinance are higher than most borrowers expect, and nearly all of them are due at closing.
- Origination fee: typically 0.5% to 2% of the loan amount. On a $3 million refinance, that’s $15,000 to $60,000.
- Appraisal: generally $2,000 to $4,000, higher for complex or large properties.
- Phase I Environmental Site Assessment: usually $2,000 to $3,500. A Phase II, if triggered, adds $5,000 or more depending on scope.
- Legal fees: lender’s counsel charges $3,000 to $10,000 for document preparation on a standard transaction. Your own attorney adds a comparable cost.
- Title insurance: calculated as a percentage of the loan amount, ensuring the lender holds a valid first-position lien. Rates vary by jurisdiction.
- Engineering or structural report: $2,000 to $4,000 if the lender requires a property condition assessment.
- Mortgage recording tax: some jurisdictions tax the recording of the new mortgage as a percentage of the loan amount; others charge a flat fee. Easy to overlook when budgeting.
Totaled up, closing costs commonly fall between 1% and 3% of the loan amount before any prepayment penalty on the existing debt. On larger deals, the percentage tends to compress because many of the third-party costs are fixed regardless of loan size.
Tax Treatment of the Proceeds and Interest
Cash pulled out through a refinance is not taxable income. The IRS treats refinance proceeds as loan proceeds, not earnings, because you have an offsetting obligation to repay. That makes cash-out refinancing one of the few ways to access property equity without triggering a taxable event.
Interest on the refinanced loan is generally deductible as a business expense for income-producing commercial property. Federal law caps the annual deduction for business interest at 30% of adjusted taxable income under IRC Section 163(j), which can bite owners of highly leveraged properties. Real property trades or businesses can elect out of the 163(j) limitation entirely, but the election is irrevocable and requires using the alternative depreciation system, which stretches depreciation schedules and reduces annual depreciation deductions.6Office of the Law Revision Counsel. 26 USC 163 Interest The trade-off between unlimited interest deductions and slower depreciation is worth modeling with a tax advisor before you commit.
How you deploy the cash matters more than the refinance itself. Capital improvements funded from proceeds get depreciated over time. Routine repairs and maintenance paid from the same proceeds are deductible in the year incurred but don’t qualify for the same treatment.
SBA 504 as an Alternative for Owner-Occupiers
If you occupy the commercial property your business operates from, look at the SBA 504 loan program before approaching conventional lenders. The 504 program allows refinancing of existing commercial debt with longer amortization periods and below-market fixed rates. If the property is purely an investment with no owner-occupancy, 504 isn’t an option.
To qualify, your business must be a for-profit U.S. company with tangible net worth under $20 million and average net income under $6.5 million after federal taxes for the two years before applying.7U.S. Small Business Administration. 504 Loans The business must fall within SBA size standards and show it can repay.
The debt being refinanced must meet the SBA’s definition of “qualified debt.” The existing loan must have been current for at least the 12 months before SBA approval, and at least 75% of the original loan amount must have gone toward an eligible fixed asset like commercial real estate or heavy equipment. Combined loan-to-value on the refinanced debt cannot exceed 90% of the fair market value of the fixed assets serving as collateral.8eCFR. 13 CFR 120.882 If your existing debt doesn’t meet these thresholds, SBA won’t approve the refinance.
The 504 structure splits the financing: a conventional first mortgage covers roughly 50% of project cost from a participating bank, a second mortgage funded through a Certified Development Company and backed by an SBA-guaranteed debenture covers up to 40%, and you contribute 10% as equity. Your effective rate blends the bank’s market rate on the first mortgage with the SBA’s fixed rate on the second.
Is Refinancing Worth It
Run the break-even. Add up every cost: origination fee, prepayment penalty on the existing loan, appraisal, legal fees, environmental reports, title insurance, recording charges. Divide the total by the monthly payment savings on the new loan. The result is how many months before the refinance pays for itself.
Break-even at 18 months on a property you plan to hold for a decade is comfortable. Break-even at 48 months when you’re thinking about selling in five years is thin. The math is simple; the inputs demand honest accounting. Borrowers routinely underestimate closing costs and overestimate rate savings, especially when a prepayment penalty eats most of the benefit.
Beyond the raw math, there are structural benefits that don’t show up in a payment comparison. Moving from a floating rate to a fixed one eliminates exposure to rising benchmarks. Extending the maturity date removes the risk of refinancing again in a tighter market. Pulling cash for a capital improvement that lifts rents can change the property’s whole income trajectory. These benefits carry real value even when the break-even on payment savings alone looks marginal.