A commercial real estate refinance is the repayment of an existing mortgage on an income property with the proceeds of a new loan, sized by the new lender’s debt service coverage, debt yield and loan-to-value tests at current rates, and paid for with the old loan’s prepayment cost, the new loan’s fees and any equity needed to cover a shortfall. The decision turns on two numbers that a coupon comparison leaves out: the proceeds under whichever sizing test binds, and the all-in cost of leaving the current loan on a specific date. An analysis started late can leave no date to choose.
Three kinds of refinance
Rate-and-term. The new loan roughly repays the old one. The purpose is a maturity, a better structure or a move from floating to fixed, with no equity in or out.
Cash-out. The new loan exceeds the old balance plus closing costs, and the owner takes the difference. It exists only when the binding test leaves room above the balance.
Cash-in. The new loan is smaller than the balance, and the owner funds the gap. On loans originated at low rates, this is a common outcome when a maturity arrives. See the 2026 maturity wall data.
How the new loan is sized
A lender runs three tests and offers the lowest result:
DSCR test: maximum loan = (NOI / required DSCR) / annual loan constant
Debt yield test: maximum loan = NOI / required debt yield
LTV test: maximum loan = appraised value × maximum LTV
The annual loan constant is the yearly payment per dollar of loan at the quoted rate and amortization, so the DSCR test is the only one of the three whose formula includes the rate. That difference is why the binding test can change between the term sheet and the rate lock. See DSCR vs. debt yield for how the two metrics diverge.
Program limits set the outer edge. Fannie Mae’s fixed-rate term sheet for conventional multifamily sets a maximum LTV of 80% and a minimum DSCR of 1.25x, with terms of 5 to 30 years. The loan a lender quotes is the lowest of the three tests run on its own NOI and its own value, and its NOI is rarely yours. See lender-specific DSCR and debt yield adjustments.
A worked example: one refinance, three outcomes
An apartment property produces $2,000,000 of NOI on the lender’s definition and appraises at $32,000,000. It carries a $20,000,000 interest-only loan at 3.75% that matures in 12 months, with a 1% prepayment premium until its open period starts six months before maturity. The new lender quotes 6.00% fixed with 30-year amortization and requires 1.25x DSCR, a 9.0% debt yield and 65% LTV.
Illustrative example: sizing the new loan
| Test | Calculation | Maximum loan |
|---|---|---|
| DSCR 1.25x | $2,000,000 / 1.25 = $1,600,000 of debt service, divided by the annual constant at 6.00% over 30 years (about 7.1946%) | $22,238,882 |
| Debt yield 9.0% | $2,000,000 / 0.09 | $22,222,222 |
| LTV 65% | $32,000,000 × 0.65 | $20,800,000 |
| Loan offered | Lowest of the three | $20,800,000 |
LTV binds. At $20,800,000 the annual debt service is $1,496,478, so DSCR is 1.34x and the debt yield is 9.62%. The DSCR test would take over if the locked rate reached about 6.64%. At 7.00%, the annual constant is 7.98363% and the DSCR test caps the loan at $20,041,009.
Illustrative example: refinancing now versus at the open period
| Refinance now at 6.00% | Open period, rate unchanged | Open period, rate at 7.00% | |
|---|---|---|---|
| New loan | $20,800,000 | $20,800,000 | $20,041,009 |
| Repay existing balance | ($20,000,000) | ($20,000,000) | ($20,000,000) |
| Prepayment premium, 1% | ($200,000) | $0 | $0 |
| Origination fee, 1% of new loan | ($208,000) | ($208,000) | ($200,410) |
| Reports, legal and title | ($120,000) | ($120,000) | ($120,000) |
| Net cash to (from) owner | $272,000 | $472,000 | ($279,401) |
Refinancing now also swaps six months of interest on the old loan ($20,000,000 × 3.75% / 2 = $375,000) for six months on the new one ($622,437 of interest on the amortization schedule), a further $247,437. If rates hold, waiting is worth $200,000 plus $247,437, or $447,437. If the rate rises 100 basis points first, the same wait turns a $272,000 cash-out into a $279,401 cash-in.
That is the trade: a known $447,437 against the risk of a rate move before the open period. A forward rate lock or a hedge prices that risk; see SOFR swap rates and fixed-rate debt. Fannie Mae’s fixed-rate term sheet lists rate lock commitments of 30 to 180 days and a Streamlined Rate Lock option.
What a refinance costs beyond the new rate
- The prepayment cost on the existing loan, computed under its own convention on the payoff date: yield maintenance, defeasance, a step-down percentage or spread maintenance. See real-time prepayment calculations and commercial prepayment penalty types.
- Fees on the new loan: origination, application and the lender’s counsel. See origination fee.
- Third-party reports. Fannie Mae’s term sheet lists an appraisal, a Phase I environmental assessment and a property condition assessment as standard.
- Escrows and reserves. The new loan typically requires replacement reserve, tax and insurance escrows (Fannie Mae’s term sheet lists all three); the old loan’s escrow balances come back after payoff, on the servicer’s timetable.
- Hedges. A new cap on a floater, or swap breakage on a swapped loan, which can be a cost or a receipt.
- Carry. The interest difference between refinancing on one date and another, as in the example.
Cash-out refinance: what changes
A cash-out refinance on commercial property runs the same three tests. What changes is the use of the result. The equity that comes out raises the debt the property carries into the next cycle, so the new loan’s DSCR cushion at its first rate reset, its IO expiry and its cash management trigger is the number to test before accepting the maximum. See interest-only expiry planning and cash management triggers.
At fund level, cash-out proceeds compete with a sale, so both belong in one hold/sell cash flow projection.
What sets the date
Step-down dates. Fannie Mae’s declining prepayment premium schedule for a 5-year fixed loan is 5-4-3-2-1, and for a 10-year loan 5-5-4-4-3-3-2-2-1-1, by loan year. Each step falls at the end of a loan year as the note defines it, and Fannie Mae’s guide allows a payoff on its form note only on the last business day before a scheduled payment date, so moving a payoff one payment date past a step can save a full point.
Open periods and notice windows. The open period, extension notice deadline and required payoff notice all fall before maturity.
CMBS maturities. In the pooling terms of one 2020 conduit, GS Mortgage Securities Trust 2020-GSA2, a missed balloon payment moves the loan to the special servicer unless the borrower delivered, on or before maturity, a binding refinancing commitment or signed purchase agreement providing for closing within 120 days. The loan transfers anyway if the borrower stops pursuing that closing or misses an assumed monthly payment, or if the closing does not happen in the window. The commitment letter has to exist before the maturity date. See tracking CMBS loans as a borrower and commercial loan modification and workouts.
The maturity wall refinancing playbook runs this as a pipeline: 24 months of maturities, decisions 12 months out, sorted by the earliest decision date.
What to track across the portfolio
- Proceeds under all three tests for every loan maturing or opening in the next 24 months, at today’s rates.
- The rate at which the binding test changes, per loan, so a rate move is read as a proceeds change.
- Prepayment cost on every candidate date, including the next step-down and the open period.
- The equity in or cash out per loan, summed by quarter against fund liquidity.
- Notice deadlines, open period starts, cap expiries and extension windows as critical dates. See loan critical date tracking.
How this looks in LoanBoss
Every prepayment convention on each loan, including the rate lookback, is abstracted and its cost calculated for any date, with yield maintenance and defeasance computed in real time and projectable to future dates, so the payoff cost of refinancing now and at the open period can be compared side by side. Alerts fire before prepayment step-downs, and extension notices, prepay changes and IO endings are tracked as critical dates. DSCR and debt yield tests run on each lender’s own adjustments, including hypothetical amortization and market-rate tests, from the property accounting feed. The SREO the new lender asks for is generated from the same data.
Frequently Asked Questions
What is the difference between a cash-out and a rate-and-term refinance?
A rate-and-term refinance replaces the existing loan at roughly the same balance to change its rate, maturity or structure. A cash-out refinance sizes the new loan above the balance and closing costs, and the owner takes the difference. The sizing tests decide which one is available.
Which test usually limits a commercial refinance?
Whichever produces the lowest loan on the lender’s NOI and value. DSCR is the only test whose formula includes the rate, so a rate rise can move the binding constraint from LTV or debt yield to DSCR between the quote and the lock.
Can we refinance before the open period?
Yes, by paying the prepayment cost under the loan’s convention on that date. Compare it with the interest saved or lost between dates and the rate risk of waiting, as in the worked example.
How early can the rate be locked?
It depends on the lender and program. Fannie Mae’s fixed-rate program offers commitments of 30 to 180 days; a forward-starting hedge can fix a rate earlier at a cost.
Does a refinance reset our covenants?
Yes. The new loan brings its own DSCR and debt yield definitions, cash management triggers, reserves and consent thresholds. Abstract them at closing, before the first test date.
Key takeaways
- A commercial real estate refinance is sized by the lowest of the DSCR, debt yield and LTV tests on the lender’s NOI and value, and only the DSCR test’s formula includes the rate.
- The category (rate-and-term, cash-out or cash-in) comes out of the sizing tests; the owner finds out which one applies.
- Total cost includes the old loan’s prepayment cost on the payoff date, new loan fees, reports, escrows, hedges and the interest carry between candidate dates.
- Waiting for an open period or a step-down anniversary has a known value and a rate risk; price both.
- On CMBS loans, a binding refinancing commitment before maturity can decide whether the loan goes to special servicing.
Related reading
- The maturity wall: a refinancing workflow playbook
- Real-time prepayment calculations
- DSCR vs. debt yield
- Commercial prepayment penalty types
- Commercial loan assumption
- Loan-to-value and debt yield in the glossary
The refinance date is a choice until the documents make it for you. LoanBoss keeps the payoff cost and the lender tests current so the choice stays yours.
Sources
- Fannie Mae Multifamily, Fixed-Rate Mortgage Loans Term Sheet (2026)
- Fannie Mae Multifamily, Declining Prepayment Premium Term Sheet (2026)
- GS Mortgage Securities Trust 2020-GSA2, preliminary prospectus (Form 424H), SEC EDGAR (2020)