Quick checklist: The core steps at a glance

  1. Clarify objectives (rate-and-term, cash-out, term extension, or debt-service relief).
  2. Run updated financials and property performance reports (NOI, rent roll, DSCR).
  3. Review current loan for prepayment penalties or defeasance requirements.
  4. Shop lenders and get prequalified offers; compare APR and fees.
  5. Order appraisal, Phase I environmental, and title work early.
  6. Lock a rate when ready; submit full application and underwriting documents.
  7. Close, pay closing costs, and confirm payoff/recording details.

Why careful planning matters

Commercial refinances are more complex than residential ones. Loans are underwritten on property cash flow, borrower credit, and collateral specifics. Unexpected items — such as a low appraisal, an environmental issue, or a hidden prepayment clause like defeasance for CMBS loans — can delay or change terms. In my practice, borrowers who prepared income statements, an updated rent roll, and a prioritized checklist closed faster and saved on fees.

Authoritative guidance: the Consumer Financial Protection Bureau and the Small Business Administration outline common documentation and lender expectations for business and commercial loans (CFPB, https://www.consumerfinance.gov; SBA, https://www.sba.gov).

Step 1 — Define your objective and run the numbers

Start by writing a clear goal: lower monthly payments, reduce total interest, shorten amortization, or extract cash for expansion. Calculate the break-even point: total refinance costs divided by monthly savings = months to recoup. If break-even is longer than how long you’ll hold the property, refinancing may not make sense.

Key financial metrics to compute:

  • Net operating income (NOI)
  • Debt service coverage ratio (DSCR) required by lenders
  • Loan-to-value (LTV) after proposed refinance

Tip: Use conservative NOI projections. Lenders and appraisers prefer stable, verifiable income over optimistic forecasts.

Step 2 — Review your current loan for surprises

Request a payoff statement and loan agreement to check for:

  • Prepayment penalties or yield maintenance clauses
  • Defeasance requirements on CMBS loans
  • Assumption restrictions or recourse provisions

Commercial prepayment penalties can be costly. For CMBS loans, defeasance can require buying replacement Treasury securities — a significant, often overlooked cost. Getting these documents to your broker or attorney early prevents unpleasant shocks.

Step 3 — Prepare your documentation (start early)

Lenders will want a thorough package. Typical documents include:

  • Last 2–3 years of business and personal tax returns (IRS forms referenced by lenders)
  • Year-to-date profit & loss and balance sheet
  • Rent roll, leases, and tenant estoppel certificates
  • Operating statements for the property
  • Receipts for recent capital expenditures
  • Insurance certificates and loss history

Assemble a clear, indexed binder (digital or physical). Organized documentation reduces underwriting questions and shortens the timeline.

Step 4 — Shop lenders strategically

Commercial lenders vary: regional banks, national banks, life companies, CMBS conduits, and specialty lenders. Each has different appetite for property types, LTVs, and borrower credit.

Compare:

  • Interest rate and index (fixed vs floating)
  • Origination fees and closing costs
  • Prepayment and defeasance terms
  • Required reserves and escrows
  • Underwriting covenants (e.g., minimum DSCR, occupancy requirements)

Don’t focus only on the headline rate. Effective comparison requires calculating APR and the total cost over the expected hold period. For tactics on timing and rate protection, see Using rate locks effectively during a refinance process.

Step 5 — Order appraisal and environmental review early

Appraisals, Phase I Environmental Site Assessments, and surveys often create the longest delays. If the appraisal is below expected value, you may need more equity or accept a higher rate.

Environmental issues (recognized environmental conditions) can trigger remediation or lender-required reserves. For commercial properties, an early Phase I is inexpensive compared with the cost of remediation later.

Step 6 — Understand underwriting and covenant traps

Commercial underwriting looks at property income, tenant stability, lease terms, and borrower strength. Expect scrutiny around:

  • Lease expirations and rollover risk
  • Concentration of rent in a few tenants
  • Capital reserves for deferred maintenance
  • Personal guarantees and cross-collateralization

Negotiate covenant terms where possible. A tighter covenant (e.g., minimum DSCR of 1.35x) may be negotiable if you present strong financials and credit history.

Step 7 — Lock your rate and manage timing

Rate locks protect your price but usually last a limited time (30–90 days). Coordinate your appraisal and underwriting so the lock period covers expected closing. If markets move, a longer lock may cost a fee but avoid re-pricing risk.

Reference: market timing on rate locks and their use in refinance planning (see internal primer: When to Refinance a Business Loan: Timing and Savings).

Step 8 — Close and confirm post-closing steps

At closing, confirm payoff amounts, wiring instructions, title recording, and any escrow reserves. Keep copies of closing statements, title insurance policies, and payoff confirmation. After closing, confirm the old loan is released and any UCC filings or liens are cleared.

Typical timeline and costs

  • Timeline: 45–120 days is common for commercial refinances; complexity (multiple tenants, environmental or title issues) can extend this.
  • Common costs: appraisal ($3,000–$15,000 depending on property), Phase I ESA ($1,000–$5,000), title and recording fees, lender legal fees, origination fee (often 0.5%–2% of loan), and potential defeasance or prepayment penalty costs.

Estimate total closing costs and compare to expected monthly savings to determine the break-even horizon.

Common mistakes to avoid

  • Waiting to order an appraisal or Phase I until after underwriting begins.
  • Comparing only nominal interest rates instead of APR and total cost.
  • Ignoring defeasance or yield maintenance on CMBS loans.
  • Over-leveraging with a cash-out refinance without stress-testing income under lower occupancy scenarios.

Case example (realistic, anonymized)

A mid-size retail owner refinanced a 10-year loan after rates dropped and occupancy stabilized. By providing two years of audited operating statements and a current rent roll, the borrower qualified for a lower rate and a 20-year amortization, reducing monthly debt service by 18%. After paying 1.5% in closing costs, the loan reached breakeven in 22 months. In my experience, having audited financials and tenant estoppels helped the borrower avoid a low appraisal dispute.

When to choose cash-out vs rate-and-term

  • Cash-out refinance: best when you need capital for expansion and the new LTV stays within lender limits. Ensure the new DSCR still meets lender requirements.
  • Rate-and-term refinance: best to lower payments or total interest without increasing loan balance.

Tax note: cash-out funds used for business purposes are typically not taxable as income but consult a tax advisor for your situation (IRS guidance may apply depending on use; see IRS resources at https://www.irs.gov).

Final professional tips

  • Engage a commercial mortgage broker early to access multiple lender options.
  • Hire an experienced commercial real estate attorney to review defeasance, prepayment, and guarantee language.
  • Keep three months of reserve operating funds available for lender-required escrows or working capital.
  • Maintain transparent communication with lenders during underwriting; proactive answers reduce conditional approvals and delays.

Resources and further reading

Internal related guides on FinHelp:

Professional disclaimer: This article is educational and not individualized legal, tax, or investment advice. Consult a qualified commercial mortgage broker, tax advisor, and attorney to tailor decisions to your business. In my practice, I work with clients to map refinancing scenarios and to quantify break-even timelines before choosing a path forward.

References cited inline and for further reading: Consumer Financial Protection Bureau (CFPB), Small Business Administration (SBA), Internal Revenue Service (IRS).