5 Key Considerations Before Refinancing Your CRE Investment
1. Interest Rates & Market Cycle
Even with recent Federal Reserve rate cuts, interest rates remain elevated compared to the historic lows of the previous cycle. Higher borrowing costs translate into increased monthly debt service, which can pressure cash flow and reduce your Debt Service Coverage Ratio (DSCR). Timing matters—understanding where we are in the market cycle is essential before locking in new debt.
2. Valuations & Loan Proceeds
CRE valuations have softened in sectors like office and retail, impacting loan-to-value ratios. Lower appraisals mean smaller loan proceeds, often requiring investors to inject additional equity to close the gap. If your property’s value has declined, refinancing may not deliver the liquidity you expect.
3. DSCR & Lender Requirements
Rising debt costs can compress DSCR below the typical 1.25x threshold, making underwriting more challenging. Lenders are stress-testing deals with higher assumed rates, which means borrowers need stronger financials and contingency plans to meet stricter requirements.
4. Prepayment & Exit Costs
Yield maintenance, defeasance, or step-down penalties can significantly erode the savings from refinancing. Before making a move, calculate your true break-even point after factoring in all fees and exit costs. A detailed cost-benefit analysis is non-negotiable.
5. Capital Source Options
Traditional banks remain conservative, especially on transitional or office assets. Alternative lenders—such as debt funds and bridge lenders—offer flexibility but often at higher spreads and tighter structures. Understanding your capital stack options is key to finding the right fit for your investment strategy.
Bottom Line
Refinancing in today’s CRE market requires a strategic approach. From interest rate trends to lender requirements and exit costs, every detail matters. At SF Capital Group, we help investors navigate these complexities with tailored financing solutions designed to maximize value and mitigate risk.
Ready to explore your refinancing options?
Contact our team today to discuss strategies that align with your investment goals.
