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The True Cost of Refinancing Property  

With many owners of commercial real estate facing flat or decreasing incomes from their properties, one of the options frequently considered as a means to enhance the financial performance of their holdings is refinancing. The financial turmoil of the past few years has resulted in many lenders adopting new loan documentation. Several of these changes can indirectly result in unexpected costs for borrowers when they seek to refinance.

• Enhanced financial covenants may increase the cash flow or income requirements for the owner's business.
• Additional financial reporting requirements and personal guaranties can impact the owner's flexibility down the road when dealing with their other assets.
• Increased debt coverage ratios restrict the owner's ability to borrow against their other assets, and those of affiliated entities.
• New underwriting standards mean that requests for changes to the standard bank documentation often result in significant delay and expense.

Under the appropriate circumstances, refinancing a commercial property may result in substantial benefits for an owner, including reduced interest expense and increased cash flow. However, when considering such a transaction, prudent owners will evaluate not only the "hard" out-of-pocket costs, but also the indirect expenses associated with the covenants and restrictions contained in the terms of the replacement loan.

Careful review of the proposed terms in consultation with their advisors will help the owner determine whether the new loan really is as good a deal as it seems.

 Contact David Tenzer