Commercial Refinance

Commercial mortgages are written with short terms — usually 1 to 10 years, most often 5 — against a much longer amortization. That structure means the balance comes due long before the property is paid off, so refinancing is not an occasional event in commercial real estate; it is a scheduled one. The question is rarely whether to refinance, but on what terms and with which lender.

The common motivations: the term is maturing and the balloon balance has to be dealt with; the property's income has grown and now supports more debt; a stabilized building qualifies for cheaper permanent financing than the bridge or construction loan that funded it; or the owner wants equity out to fund the next acquisition, a renovation, or business working capital.

The same two tests that governed the original loan govern the refinance: loan-to-value and debt service coverage.

Maximum LTV on a conventional commercial refinance is generally 75% on multi-family, 65% to 75% on industrial and retail, and 65% on office. CMHC-insured multi-family refinances can reach 85%. Against that, the new loan must still clear a 1.20x to 1.30x DSCR on today's rate.

When rates are higher than they were at the last renewal, DSCR is usually what limits you. A building whose income has not grown as fast as rates have risen may support a smaller loan than the one it currently carries — which is why maturing commercial mortgages sometimes require a cash paydown at renewal rather than releasing equity.

A retail plaza in Abbotsford is appraised at $4,000,000 with $2,100,000 remaining on a maturing mortgage.

The binding number is DSCR, so the refinance tops out near $2,440,000 — enough to clear the existing $2,100,000 and release roughly $340,000 before costs. Extending the amortization to 25 years would lower the annual payment per million and lift the DSCR-supported loan, at the cost of more total interest.

Breaking a commercial mortgage mid-term is expensive and rarely resembles a residential penalty. Most commercial loans are either closed for the full term, or open only against a yield maintenance charge — the lender is made whole for the interest it expected to earn, discounted to present value. On a large balance with several years remaining, that figure can run into six figures.

Refinancing at maturity avoids the penalty entirely, which is why the work should start 6 to 9 months before the term ends. That window is long enough to obtain a current appraisal, stabilize the rent roll, resolve any environmental item, and take competing commitments to market rather than accepting the incumbent lender's renewal offer by default.

A commercial refinance carries most of the same third-party costs as a purchase:

Run the total against the benefit. On a rate-driven refinance, the break-even is straightforward arithmetic; on an equity take-out, the test is whether the released capital earns more than the all-in cost of the new debt.

One of the most valuable commercial refinances is the exit from short-term money. A property bought with private financing, repositioned, re-tenanted, and stabilized will often qualify for bank or CMHC-insured permanent financing at a fraction of the interest cost. The same applies to a completed construction project moving to takeout financing.

The lender will want to see the story completed: signed leases with reasonable remaining term, 6 to 12 months of actual operating history at the new rents, occupancy permits in hand, and clean financial statements for the holding entity. Start assembling that file while the short-term loan still has runway — waiting until 30 days before maturity removes your negotiating position.