Performing a commercial mortgage refinance is normally an expensive and time consuming process that has a few, potentially expensive pitfalls. Although we don't offer a "secret guide" on avoiding them, below is some thoughts on how you can better prepare yourself on the main issues.

Be Realistic About Value

Lower than expected property value, seems to be more of an problem with owner occupied properties as investment properties tend to be easier to predict value (due to the income stream). Further, owner occupants seem to have more of an emotionally attachment to their property, having put much time and money into repairs/alterations and have run their business's out of the building. Whatever the case may be, the results of over stating value are almost always the same - a canceled loan or having the interest rate bumped up.

Commercial appraisals normally run between $2,000 - $5,000 for properties under $3,000,000 in value. Appraisals for hotels or other similar complicated properties can be as much as $10,000. Regardless of the cost, once the report has been ordered the borrower is not going to get their money back if the loan does not close.

So, you might want to ask the lender/bank what your rate would be if you do not hit the predicated value. It should be easy for the bank representative to tell you. For example, if your predicted Loan to Value is 60%, find out, before you write a check and sign a Commitment Letter, what the rate would be if your loan to value came out at say, 70%.

Prepayment Penalties and Lock Outs

Basically all commercial mortgages have prepayment penalties. These fees, that the borrower incurs if the loan is paid off prematurely, range from 3% to 10% of the loan amount and are in place normally for 3 -10 years.

Lock out fees can be much more expensive and should be avoided if possible. Basically the lender demands all interest that would have been earned during the lockout period. For example, if the borrower had to sell 1 year into a 5 year lock out he would owe ALL 4 years worth of interest... So, obviously try to match your prepayment penalties with your expected holding period and for your fixed period of your loan. It is not unheard of for the borrower's prepayment period to be longer than the fixed period of their loan. Also, keep in mind your prepayment penalty is often negotiable and many commercial mortgages are assumable as well.

Upfront Fees

There's really no reason why you have to pay upfront fees to a broker or lender to work on your loan. There are probably some exceptions to this that make sense. For example, you have a very complicated loan or one that has a small chance of success and you're essentially paying a consulting fee. But on your typical commercial mortgage refinance the only time you should write a check is to pay for third party reports when you sign a commitment letter.