| Detail | Explanation |
|---|---|
| Net cash | New loan minus existing payoff, closing costs, and required reserves |
| Sized to | Current appraised value and underwritten income |
| Tests | Loan-to-value, DSCR, and often debt yield |
| Reviewed | Use of proceeds, sponsor liquidity, and ownership history |
How does a commercial cash-out refinance work?
The owner applies for a new first mortgage. The lender orders an appraisal, underwrites the property's net operating income, and sizes the loan to its tests. At closing, the new loan pays off the existing lender, covers closing costs and any reserves, and the remainder goes to the owner.
Common uses include returning equity to investors after a lease-up or renovation, funding capital improvements, buying out a partner, or providing equity for another acquisition. Some lenders price or size a cash-out loan more conservatively than a rate-and-term refinance, and some require the use of proceeds to be disclosed.
Worked example
In this hypothetical example, an owner holds a property now appraised at $10,000,000 with $650,000 of net operating income and a $4,000,000 existing loan, which is 40.00% of current value. A new lender applies 3 tests at a 7.00% rate on a 30-year amortization.
| Step | Amount |
|---|---|
| Loan at 65% loan-to-value | $6,500,000 |
| Loan at 1.25x DSCR | $6,513,328 |
| Loan at 9.00% debt yield | $7,222,222 |
| New loan, lowest of the 3 | $6,500,000 |
| Less existing loan payoff | $4,000,000 |
| Less closing costs and reserves | $150,000 |
| Net cash to owner | $2,350,000 |
What limits cash-out proceeds?
The smallest result from the lender's sizing tests controls, which in the hypothetical is loan-to-value, with DSCR close behind. A higher appraised value would not add much, because coverage would bind almost immediately. The loan sizing calculator identifies which test sets the loan.
Value itself comes from the appraisal. The federal Interagency Guidelines for Real Estate Lending Policies define value for bank lending as an opinion or estimate of market value set forth in an appraisal or evaluation. An owner who bought well or added value can refinance against the higher current figure, though some lenders look harder at a large jump in value shortly after purchase.
What lenders review on a cash-out request
For a commercial refinance between $1M and $100M, submit the property and Capital Partners will review how much equity a new loan can return.
- Use of proceeds, and whether any cash goes back into the property
- Seasoning, meaning how long the owner has held the property and whether improvements support the new value
- Sponsor liquidity and net worth after the refinance
- Existing prepayment penalty, yield maintenance, or defeasance cost on the current loan
- Lease rollover and tenant credit over the new loan term
Alternatives to a full cash-out refinance
- A supplemental or second loan behind the existing first mortgage, when the current lender permits it
- Mezzanine debt or preferred equity when senior proceeds fall short
- A recapitalization that brings in new equity to buy out a partner
Sources
Common questions
How much cash can I take out of a commercial property?
The new loan is limited by the lowest of the lender's LTV, DSCR, and debt yield results. Net cash is that loan minus the existing payoff, closing costs, reserves, and any prepayment cost on the current loan.
Do lenders care what I do with cash-out proceeds?
Many do. Lenders often ask for the use of proceeds and may size or price the loan more conservatively when cash leaves the property.
Can I do a cash-out refinance soon after buying a property?
Some lenders allow it, particularly when the owner has added value through leasing or renovation. Others limit value to the purchase price plus documented improvements for a period after acquisition.
Is a cash-out refinance the same as a rate-and-term refinance?
A rate-and-term refinance replaces the existing loan without significant cash back. A cash-out refinance increases the loan and returns equity to the owner.
Send this deal to a principal
Share the basics now. A principal responds within 1 business day, and you can send the full package after the first conversation.