There are several potential issues that can delay or “kill” your commercial mortgage refinance. Some of which will just tack on a few days or weeks to the process while others will completely eliminate the lenders interest in funding your loan. A prime example of this is value and environmental issues.
1. Title Problems. A forgotten lien on title can have a major impact on closing. Perhaps the dollar amount of the lien is substantial and cannot be rolled into the loan amount. Or the borrower may challenge the lien and will have to get it removed/resolved before the lender will fund the transaction.
2. Value. When the borrower and lender negotiate a loan term sheet, one of the most important components is the loan to value ratio. For example, on a refinance virtually all banks will not go beyond 80% loan to value. In other words, if your property is worth $1,000,000, your potential loan cannot exceed $800,000. If after your appraisal has been complete and the value comes out at say $900,000, you have a problem and a dead loan.
Besides the obvious frustration due to the canceled loan, there can be much disagreement with exactly how the value was determined. Appraisal reports are not perfect and have a subjective component to them. Deciding which comparable recent sales to use and how exactly to add/remove value from these comps is up to the discretion of the appraisal company.
3. Sudden Change in Business. Lenders sometimes call this “Adverse Change”. Basically what it means is that there has been some type of borrower change from the time of initial loan approval to the closing. With some commercial mortgage refinances taking as long as 90 - 120 days to complete, much can go wrong in that time.
For example, we had a transaction where the borrower had to purchase a small fleet of trucks for his business. The truck loan was personally guaranteed and was reported on his personal credit report. The additional debt dragged his score to the minimum acceptable levels for the funding bank. In addition, the cash flow was tight to begin with and this additional debt also affected the numbers. It created some tense moments for all involved, but was resolved.
4. Environmental Issues. The liability for the lender having to take back a property with environmental issues is huge. No one wants to be stuck with the bill and cumbersome process to clean up a property. Not to mention the possibility of being sued by neighboring owners. It is not unheard of for these costs to exceed the value of the real estate itself.
In regards to a commercial refinances, most environmental issues are not on the scale of Chernobyl. What typically happens is that the results of the Phase One come in with concerns and a recommendation for a Phase 2 report, which typically requires borings and soil samples. The cost on the Phase One is around $1,800 while a Phase 2 is much more expensive. It is not unheard of for that report to be approximately $10,000.
The borrower will have to pay for this report upfront and in cash. He could be reimbursed this cost at closing, but will have to get there - if the results of the Phase 2 shows more issues the borrower could be in a very bad position and may have dead loan and be out the $10,000.
5. A Disaster. It goes without saying that if there is some type of damage to the subject property or perhaps a death to one of the partners, that this will have a substantial delay in the least, to the refinance.
6. Insurance. The subject property has to be insured. To some this may seem painfully obvious but we have seen many refinances get delayed because of this. This problem is especially relevant on refinancing out of private mortgages and or seller financing. Many private lenders don’t confirm that proper insurance is in place or simply do not care. Also, on cash out refinances the borrower may have to increase the insured amount as the loan increases which can create issues in and of itself.
By: Jeff Rauth
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