When and how to refinance commercial property: the reasons owners refinance, what lenders check, the costs and refinancing in Colorado in 2026.
Refinancing replaces an existing loan with a new one.
Commercial owners refinance to pay off a balloon payment, lower the monthly payment, take cash out or consolidate debt. For the loan types available, see commercial real estate loan options.
The new loan pays off the old one at closing. The property is underwritten again from scratch, at today’s value, today’s income and today’s rates.
Why Owners Refinance
Most commercial loans end in a balloon payment, which is usually repaid by refinancing the property. Owners also refinance:
- to reduce the monthly payment;
- to free up cash, though a sale-leaseback is another way to raise cash while staying in the building;
- to consolidate other debt into one loan.
Other common reasons:
- To leave a bridge or construction loan. A stabilized building moves into cheaper permanent debt.
- To change the rate type. An owner swaps a floating rate for a fixed one, or the reverse.
- To release a guarantor. A partner exits, or a recourse loan is replaced with a nonrecourse one.
- To fund improvements. Cash out pays for a new roof, tenant improvements or an expansion.
The 2026 Maturity Wave
A large share of commercial debt must be refinanced this year. The Mortgage Bankers Association (MBA) reported on February 9, 2026 that $875 billion of commercial and multifamily mortgages matures in 2026. That is 17% of the $5.0 trillion outstanding.
| Property type | Share of its mortgage balance maturing in 2026 |
|---|---|
| Hotel and motel | 30% |
| Industrial | 23% |
| Office | 17% |
| Health care | 15% |
| Multifamily | 13% |
Banks and other depositories hold $396 billion of the 2026 maturities, the largest group. Many of those loans were written when rates were far lower: the 10-year Treasury averaged about 1.40% in 2021, per FRED data.
Cash-Out, Rate-and-Term and Cash-In Refinances
Every refinance falls into one of three types, depending on how the new loan compares with the old balance.
| Type | New loan vs old balance | Typical goal |
|---|---|---|
| Rate-and-term | About the same | Change the rate, term or lender |
| Cash-out | Larger | Pull equity out for other uses |
| Cash-in | Smaller | Bring cash to closing to qualify |
Cash-in refinances have become common. When rates rise or values fall, the new loan can come in smaller than the old balance.
What Lenders Look For in a Refinance
A lender applies the same tests to a refinance as to a purchase: value and income.
Lenders order an appraisal for a refinance. They size the new loan on loan-to-value and debt service coverage, as explained in LTV limits on a refinance and DSCR requirements.
The lender will usually ask for:
- Two or three years of operating statements and a year-to-date statement.
- A current rent roll, with leases and lease expirations.
- The existing loan’s payoff figure and payment history.
- A capital expenditure history and any planned repairs.
- The owner’s and guarantors’ financial statements and tax returns.
Lease rollover matters. A large tenant leaving within the new loan term can shrink the loan or require a leasing reserve.
Worked Example: A Cash-In Refinance
Assume a building with a $2,600,000 balloon due. Net operating income is $250,000. All figures are illustrative.
- Value at a 7.0% cap rate: $250,000 / 0.07 = about $3,571,400.
- LTV test at 65%: about $2,321,400.
- DSCR test at 1.25, with a 7.10% rate and 25-year amortization: about $2,337,000.
- The smaller result wins: about $2,321,400.
- Shortfall: $2,600,000 − $2,321,400 = about $278,600, plus closing costs.
The owner must bring that cash, find a second source of capital or sell. The OCC warns of this exact risk: owners who make every payment can still find it difficult to refinance the balloon if values decline.
When Rates Bind Before Value Does
In low cap rate markets, the debt coverage test usually limits the loan first. A building priced at a 5.5% cap rate may support a 65% LTV loan on value, but not on income at a 7% rate.
That is why net operating income growth before a refinance often matters more than a higher appraisal.
When to Refinance: Timing the Decision
The best time to start is well before the loan matures.
- Twelve to eighteen months out: read the prepayment clause and model the new loan at today’s rates.
- Nine to twelve months out: address deferred maintenance and renew key leases.
- Six to nine months out: request term sheets from several lender types.
- Three to six months out: sign a term sheet and order the appraisal and reports.
- Before maturity: close the new loan and pay off the old one.
A short extension from the current lender can buy time. The OCC notes that repeatedly renewing a loan on interest-only terms can signal a troubled loan, so lenders treat extensions with care.
Costs of Refinancing
The costs of refinancing include prepayment penalties, closing fees and transaction fees.
Some loans charge a penalty for early repayment, and conduit loans require defeasance. Calculate these costs before deciding to refinance.
Prepayment Penalties Compared
The prepayment clause in the current loan sets the cost of leaving early.
| Type | How the cost is set | When it hurts most |
|---|---|---|
| Lockout | No prepayment allowed for a period | Any early sale or refinance |
| Step-down | A falling percentage of the balance, such as 5-4-3-2-1 | Early years of the loan |
| Yield maintenance | Present value of payments times the note rate minus a matching Treasury yield | When rates have fallen |
| Defeasance | Replace the property with Treasury securities that make the payments | When rates have fallen |
| Open | No penalty | Rarely, usually at a higher rate |
Step-down example: with a 5-4-3-2-1 schedule, paying off a $1,800,000 balance in year three costs 3%, or $54,000.
Yield maintenance example (illustrative): a $1,800,000 balance at 6.50%, with 24 months left. The 2-year Treasury was 4.67% on October 28, 2026, per FRED.
- Monthly rate gap: $1,800,000 × (6.50% − 4.67%) / 12 = about $2,745.
- Present value of 24 such payments at 4.67%: about $62,800.
If the note rate were below the Treasury yield, the formula would give zero. Many loans still charge a minimum fee, often cited as 1% of the balance. The exact formula is in each loan’s documents.
How Defeasance Works
Defeasance does not pay off the loan; it replaces the collateral. A broker-dealer assembles U.S. Treasury securities whose cash flow covers every remaining payment through maturity.
The securities sit in an account held for the lender’s benefit, and their income makes the loan payments. The property is released. Most conduit loans can instead be assumed by a buyer for a fee, which avoids defeasance on a sale.
Closing Costs on the New Loan
Expect to pay the new lender’s costs too:
- Origination fee or points.
- Appraisal, environmental report and property condition report.
- Title insurance, survey and recording fees.
- Lender and borrower legal fees.
- Funding new tax, insurance or repair reserves.
The full list of commercial closing costs applies, though a refinance skips the costs tied to a sale.
Refinance Options by Property and Owner
Different owners have different paths.
| Owner situation | Options to compare |
|---|---|
| Owner-user business | SBA 504 refinance or a bank owner-occupied loan |
| Stabilized investment building | Bank, life company, CMBS or credit union permanent loan |
| Apartments, five or more units | Agency or bank multifamily loan |
| Building with vacancy or rollover | Bridge loan until leased |
| New building after construction | Permanent takeout or a construction-to-permanent conversion |
Business owners who occupy their buildings should also read owner-occupied loans for Colorado businesses. Owners leaving a short-term loan can compare paying off a bridge loan and converting a construction loan.
Refinancing in Colorado’s 2026 Market
Refinancing pressure is one of the main forces in Colorado’s 2026 market.
RMCRE brokers report that interest rates and refinancing pressure shape most owners’ decisions. Owner-users can also refinance qualified debt with an SBA 504 loan; see SBA 504 refinancing in Colorado.
Rates set the size of the new loan. On October 28, 2026, the 5-year Treasury was 4.85% and the 10-year was 5.05%, per FRED. Banks eased standards for nonfarm nonresidential and apartment loans in the Fed’s July 2026 survey, which helps refinancing borrowers.
Local cap rates decide whether value or income limits the loan:
| Market | 2026 cap rate (RMCRE market update) | Likely limit on a refinance |
|---|---|---|
| Aspen | 4.5% to 6.0% (2026 YTD) | Debt coverage |
| Steamboat Springs | 6% (June 2026 YTD) | Debt coverage |
| Grand Junction / Mesa County | 7.0% (Q2 2026 YTD) | Either test |
| Montrose | 8% (Q2 2026) | Usually value |
Owners in the Montrose commercial market and Grand Junction can often refinance on value. Owners in Aspen or Steamboat Springs usually hit the coverage test first.
Colorado Property Taxes and the Refinance
Property taxes are an operating expense, so they change NOI and the loan size. Most Colorado commercial buildings are assessed at 25% of actual value for 2026, down from 27% in 2025.
Colorado assessors reappraise real property every odd-numbered year. Gunnison County’s assessor explains that values reflect the market as of June 30 of the prior year. The lender’s appraisal is separate and reflects value at the time of the refinance.
Mistakes to Avoid
- Starting late: a lender that sees a balloon date weeks away has all the leverage.
- Skipping the prepayment math: yield maintenance or defeasance can wipe out the savings of a lower rate.
- Assuming the old loan amount: the new loan is sized on today’s income and rates, not the original deal.
- Letting leases lapse: a key tenant without a renewal can shrink the loan or trigger a leasing reserve.
- Comparing only rates: fees, reserves, recourse and the next prepayment clause all change the real cost.
- Ignoring the next maturity: a short term at a low rate can leave the same refinance problem in a few years.
Who Benefits Most From Refinancing
Refinancing tends to pay off for owners whose income has grown since the last loan. It also helps owners with floating-rate debt who want a fixed payment.
It pays off least for owners in the early years of a loan with heavy prepayment protection. For them, waiting or selling may cost less.
Frequently Asked Questions
When should you start refinancing a commercial loan?
Start 12 to 18 months before the balloon date. That leaves time to read the prepayment terms, renew key leases and compare lenders. Appraisals and reports alone can take weeks.
Can you refinance commercial property with a prepayment penalty?
Yes, but the penalty is paid at payoff and adds to the cost. Compare the penalty with the savings from the new loan over the time you plan to hold. Step-down penalties fall each year, so waiting can lower the cost.
How much cash can you take out in a commercial refinance?
The new loan is limited by the lender’s LTV and DSCR tests, whichever is lower. Cash out is the new loan minus the old balance and closing costs. If the new loan is smaller than the balance, the owner must bring cash instead.
Does a refinance need a new appraisal?
Yes, lenders order a new appraisal for a commercial refinance. The county assessor’s value is not used to size the loan. The appraisal reflects current income, cap rates and comparable sales.
What if a building cannot qualify for a refinance?
Options include bringing cash to closing, a short extension from the current lender, a bridge loan or a sale. Raising NOI through leasing can also enlarge the new loan. A broker and lender can model each option.
Valuation for a Refinance
RMCRE members provide valuation counseling for refinancing, built on local data rather than a comparable from another market. See refinance valuation counseling.
We have advised owners across Colorado mountain towns since 2010 as Rocky Mountain Commercial Real Estate. Our partner brokers price buildings on local sales, rents and cap rates, so a refinance starts with a realistic value.
