Updated: Jan 9
Refinancing happens when an existing loan on a property is paid off and a new loan is taken out to cover the property’s mortgage. If you invest in a syndication, the Syndicator is generally the one who determines the need and the timing of the refinancing, and it’s usually done to provide various benefits to investors. The new loan is based on the property’s valuation, loan payment history, and credit worthiness of the Syndicator.
Reasons to Refinance
At times it may be beneficial for a syndicator to refinance a loan on the property. It could be due to a variety of reasons. Here are some of those reasons:
Reason #1: Tax Free Equity
The number one reason for refinancing is pulling equity out of the property after its value is higher. Let’s look at this example: a building is worth $10M with 70% LTV (loan to value), which is $7M in financing. A year later the building is worth $12M, and another loan at 70% LTV is available, for total of $8M. If you refinance, you can return the original loan of $7M, place a new $8M debt on the property and distribute $1M (minus prepayment penalties).
Reason #2: Better Terms
Another reason to refinance is getting a new loan with better interest rates. The lower interest rates can help improve cash flow by lowering the annual debt service. Plus, there may be an opportunity to reload the amortization up to 30-years. That simply means that the new loan won’t be due until 30-years from now, which provides plenty of opportunity to find better rates or terms without the pressure of having the loan come due in a few years.
Here’s something else to consider: refinancing provides an opportunity to consolidate several loans into one. By emphasizing the strengths of several properties against the risks or weaknesses of others, it may be possible to get more favorable rates or terms from a lender, along with a reduction in fees as well.
Whatever the reason, it’s important to continually look at all available options in order to maximize your investments.
Refinancing Benefits to Investors
As mentioned before, the main benefit of refinancing multifamily properties is to recoup equity. If it’s a cash-out refinance, there can be a considerable amount of money to be used either as working capital (which is money that’s used to cover the difference between current assets and liabilities) to purchase other properties or to pass through to investors.
Syndicators are able to return up to 75% of the investor’s initial investment when they refinance the property, which usually occurs in year 2 or 3. And of course, this money comes in tax free as there is no tax liability on loan proceeds. It’s tax free because the source of the distribution to investors is a loan, and not income from rent.