Office Mortgage Refinancing

By: jeff rauth

Owners conducting an office mortgage refinance have a broad range of finance options. This is due to several factors, such as loan amount, whether the property is owner occupied or an investment, single unit or multi tenant, strength of owner, etc. In addition there are several different types of office buildings (For example, office condo's, Class a- c,) which further dictates loan options.

As far as underwriting is concerned, fundamentals are still critical; loan to value, debt coverage ratio, strength of tenant, credit worthiness of borrower, and property analysis come into play. Below is a brief discussion of each underwriting component and how it relates to office building refinances.

Debt Service Coverage Ratio restrictions are typically set at 1.2 for both investors and owner occupants of office properties. Meaning that for every $1.20 of net income (income after taxes, insurance etc have been paid) the property/business produces, the mortgage payment will not exceed $1.00. Said in another way, after all expenses and the mortgage has been paid, the owner will need to net $.20 to qualify.

Exceptions can be made with this rule on office refinances. For example, on owner occupied transactions it is not uncommon for the lender to consider other source of income that the borrower has to replace low income that the business lacks. In addition, stated income loans (commercial loans that do not require business or personal tax returns) can be an outstanding option for owners that have low debt coverage ratios due to either overstated expenses, current high levels of vacancy, or understated (or lack of) income.

Loan to value restrictions on office building refinances are normally capped at 80% on a rate and term refinance and 75% loan to value on cash out refinances. Higher LTV's are available, for example there are a few lenders that will go as high as 90% but this comes at a steep price for the borrower - raising rates by as much as 2-3%. On the flip side, lower loan to values will normally reduce interest rates for the borrower.

Tenant evaluation is not as important within the office property category as others (like single tenant NNN properties) but still important. Relevant information includes time left on leases and renewal options. Further on multiple unit properties lenders prefer the lease expirations to be staggered and most banks/ lenders want to see at least 3 years left on the current leases. Some traditional banks will not allow the fixed period of the loan to exceed the time left on leases.

The personal credit worthiness of the borrower will be scrutinized. 680 credit score is normally the minimum for the best finance options. Exceptions can be made on this as well with some conventional lenders considering scores as low as 600. The overall strength of the property, tenants, DSCR, and LTV can offset concerns on low credit scores. For corporations, business performance and credit rating will be evaluated.

Fundamentals of the building are critical. Market value and market rent is paramount and will be evaluated and compared to the subject property. Any negatives with the condition, appearance, location, accessibility, and local market conditions, as well as other factors will reduce options for the borrower.



All in all, owners considering an office mortgage refinance should be pleased with the broad range of finance options available to them as this is one of the preferred building types by banks/lenders.

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