{"id":20435,"date":"2019-05-01T18:35:07","date_gmt":"2019-05-01T23:35:07","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=20435"},"modified":"2024-12-29T23:28:57","modified_gmt":"2024-12-30T04:28:57","slug":"commercial-real-estate-loan-refinancing","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/real-estate-modeling\/commercial-real-estate-loan-refinancing\/","title":{"rendered":"Commercial Real Estate Loan Refinancing Tutorial (16:58)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Commercial Real Estate Loan Refinancing Tutorial<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/real-estate-modeling\/commercial-real-estate-loan-refinancing\/#Lesson_Outline\">Lesson Outline<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/real-estate-modeling\/commercial-real-estate-loan-refinancing\/#Downsides_to_Refinancing\">Downsides to Refinancing<\/a><\/li><\/ul><\/nav><\/div>\n\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<p><strong>Table of Contents:<\/strong><\/p>\n<ul>\n<li><strong>1:24<\/strong> The Short Explanation for Refinancing<\/li>\n<li><strong>4:27<\/strong> Examples with the Property\u2019s Value Increasing<\/li>\n<li><strong>12:47<\/strong> Different Types of Lenders and the Downsides of Refinancing<\/li>\n<li><strong>15:32<\/strong> Recap and Summary<\/li>\n<\/ul>\n<div class='code-block code-block-8' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22172830\/house-icn.png\" alt=\"Real Estate Modeling\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Learn Property Modeling from A to Z with the <strong>BIWS Real Estate Modeling Course<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Evaluate property developments and acquisitions<\/h4>\n              <p>You\u2019ll assess the risks and rewards and make investment recommendations<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Master financial modeling<\/h4>\n            <p>You\u2019ll build office, retail, hotel, industrial, multifamily, and pre-sold condo models<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 11 case studies<\/h4>\n            <p>Build 6 shorter \u201ccrash course\u201d models and 5 detailed \u201con the job\u201d ones\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/real-estate-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Real-Estate-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div>\n<\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Lesson_Outline\"><\/span>Lesson Outline<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A pair of questions that came in the other day:<\/p>\n<p>\u201cCan you explain, in layman\u2019s terms, why you often assume that Debt gets refinanced in real estate deals?\u201d<\/p>\n<p>\u201cAlso, why is the amount of new Debt raised often different from the amount of existing Debt repaid?\u201d<\/p>\n<p><strong>SHORT ANSWER:<\/strong> Equity Investors complete refinancings to boost their returns in real estate deals \u2013 and because it\u2019s in everyone\u2019s best interest to do so.<\/p>\n<p>\u201cRefinancing\u201d means repaying existing Debt \u2013 almost all real estate deals involve Debt \u2013 by raising new Debt (think of it as \u201creplacing\u201d existing Debt).<\/p>\n<p>Refinancing boosts returns for the Equity Investors by reducing the interest expense and letting them earn back some of their initial investment before the exit (sale of the property).<\/p>\n<p>There are three main, specific reasons to refinance:<\/p>\n<p><strong>Reason #1:<\/strong> Interest rates have fallen, or the property\u2019s credit profile has changed, and the Equity Investors can get lower rates.<\/p>\n<p>For example, maybe interest rates have fallen from 5% to 4% \u2013 that may seem like a small difference, but since property deals often use 50-70% leverage, lower interest rates could result in a significant increase in cash flow.<\/p>\n<p><strong>Reason #2:<\/strong> The property\u2019s value has increased, so by refinancing at the same <a href=\"https:\/\/breakingintowallstreet.com\/kb\/real-estate-modeling\/loan-to-value-ltv\/\" target=\"_blank\" rel=\"noopener\">\u201cLoan to Value\u201d (LTV) Ratio<\/a>, the sponsor can earn back some of its initial investment early \u2013 before the exit.<\/p>\n<p>For example, if an investor pays $10 million for a property that generates $600K in Net Operating Income (NOI) in Year 1 (6% Cap Rate) and uses a 70% LTV, that\u2019s $7 million of Debt.<\/p>\n<p>By Year 3, the property\u2019s NOI has increased to $650K, and market conditions have stayed about the same, so assuming the same 6% Cap Rate, the property is now worth $650K \/ 6% = $10.8 million.<\/p>\n<p>The New Debt would be worth $10.8 million * 70% = $7.6 million at a 70% LTV now, so the extra $600K in proceeds go to the Equity Investors early.<\/p>\n<p>We demonstrate a more complex example of this with a $54 million AUD hotel in Darwin, Australia, acquired at an 8.80% Cap Rate using an 85% LTV.<\/p>\n<p>After four years, the forward NOI has increased from $4.7 million to $6.3 million, so it is worth $70.5 million at a 9.00% Cap Rate.<\/p>\n<p>We refinance at a 75% LTV, slightly lower, and use a $52.9 million Permanent Loan to repay the $44.4 million of remaining acquisition debt and mezzanine at this point.<\/p>\n<p>That $8.5 million \u201cextra\u201d goes to the Equity Investors (it\u2019s a bit less due to the financing fees).<\/p>\n<p>Without the refinancing, the 5-year IRR would be 17.9%; with the refinancing, it would be 19.1%.<\/p>\n<p>This is a small difference because Cap Rates rise slightly and the LTV drops \u2013 but if <a href=\"https:\/\/breakingintowallstreet.com\/kb\/real-estate-modeling\/cap-rate\/\" target=\"_blank\" rel=\"noopener\">Cap Rates<\/a> fall or the LTV stays the same or increases, refinancing could add far more than 1% to the IRR.<\/p>\n<p><strong>Reason #3:<\/strong> The terms of the Debt require a refinancing. Different lenders target different risk and potential returns, and Construction and Bridge Loan investors don\u2019t want to stay on board once a property is built or stabilized.<\/p>\n<p>So, these lenders often require property owners to refinance under certain conditions or when there\u2019s a \u201cchange of control\u201d (someone else buys the property).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Downsides_to_Refinancing\"><\/span>Downsides to Refinancing<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The Equity Investors might not refinance if the property\u2019s value has fallen or if interest rates have risen.<\/p>\n<p>Refinancing does present some risk because it could increase the default risk, especially if the Interest Coverage Ratio or Debt Service Coverage Ratio fall.<\/p>\n<p>Finally, it can sometimes be tricky to estimate the correct property value and use it in these formulas, especially if the property has not yet stabilized and will take time to do so.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you\u2019ll learn how to complete a three-statement modeling case study for an industrials company (Illinois Tool Works) under extreme time pressure \u2013 30 minutes \u2013 and you\u2019ll get the key tips, tricks, mistakes to avoid, and suggested completion order.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-20435","biws_kb","type-biws_kb","status-publish","hentry","kb_category-real-estate-modeling"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/20435","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=20435"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}