A cash-out refinance replaces your existing commercial loan with a larger one and returns the difference as cash. For investors building a portfolio it is the primary mechanism for recycling capital: value created in one asset funds the next acquisition, without triggering a sale.
How a commercial cash-out refinance works
The lender appraises the property at its current value, sizes a new loan against that value and the property's income, pays off the existing debt, covers closing costs, and returns the balance to you.
The equity being released comes from two sources: principal you have paid down, and appreciation or income growth since you bought. On commercial property the second usually dominates, because value is driven by income — improving NOI raises value directly.
The mechanism that makes commercial investing scale: raise a property's NOI, and you raise its appraised value. A cash-out refinance converts that created value into deployable capital, tax-deferred, without selling the asset that produced it.
Why investors use it
- Fund the next acquisition without selling the current asset or triggering a taxable gain on the proceeds
- Capture created value after a repositioning, renovation, or successful lease-up
- Exit a bridge loan into permanent financing while taking cash out at the same time
- Restructure debt from a maturing or unfavourable loan into better terms
- Consolidate where multiple loans on the same asset can be combined
Leverage limits and seasoning
Cash-out is consistently the most conservatively underwritten purpose in commercial lending, on both leverage and timing.
- Lower maximum LTV than a purchase. Expect a meaningful step down from acquisition leverage. Lenders retain more equity cushion when releasing cash.
- Seasoning requirements. Most lenders want the property held for a defined period before using appraised value rather than your purchase price. Programs vary, and this is worth confirming early if you have recently acquired.
- Stronger coverage requirement. A higher DSCR threshold typically applies than on a rate-and-term refinance.
- Stabilisation. The property generally needs documented, stabilised income. A lease-up asset is a bridge conversation, not a cash-out one.
Our seasoning requirements page covers the residential equivalent in detail; commercial programs apply the same logic with their own thresholds.
What underwriting looks at
- Current appraised value, derived primarily from income on commercial assets
- Trailing 12-month operating performance, not projections
- Rent roll and lease terms, including rollover exposure in the next few years
- Debt service coverage at the new, larger loan amount
- Sponsor liquidity post-closing, including the cash being released
- Capital expenditure history and any deferred maintenance
The most common cash-out disappointment: a borrower models proceeds from their own view of value, and the appraisal comes in on trailing income rather than a pro forma. On commercial property the appraiser is valuing what the asset has done, not what it will do.
How proceeds may be used
Because this is a business-purpose loan, proceeds must serve a business or investment purpose. In practice that is broad: acquiring more property, improving existing assets, funding operations, or paying down other business debt.
What it does not cover is personal use. Pulling equity from a commercial asset to fund personal spending changes the character of the transaction, and lenders ask about intended use for exactly that reason.
Costs and trade-offs
- A larger loan means a higher payment, which lowers the property's coverage ratio and its monthly cash flow. Model the post-refinance ratio, not the current one.
- Full closing costs apply again — origination, third-party reports, legal, title, and recording.
- Prepayment penalties on the existing loan may apply. Check the schedule before assuming a refinance is available now.
- Rate risk. You may be replacing an older, cheaper loan with a current-market one. Compare total cost, not just the cash released.
- Reduced equity cushion means less protection if values or income soften.
Program parameters vary by lender and property type and change with market conditions. Figures here describe what is typical across the commercial and business-purpose market — they are not a quote. Send us the scenario for real numbers.
