Thinking about refinancing a building you own? Before a lender sets the new loan amount, it needs a supported opinion of what the property is worth today. That is the job of the commercial refinance appraisal, and it shapes how much you can borrow, how much cash you can take out, and sometimes whether the deal works at all.
- How the appraised value sets the size of a refinance loan
- Who orders the appraisal, and when a new one may not be needed
- What owners and lenders can do to keep the process moving
How a Commercial Refinance Appraisal Sets Your Loan Amount
Lenders look at two things in a refinance. First, can the property’s income cover the payment? Second, is the building worth enough to secure the loan? According to the Interagency Appraisal and Evaluation Guidelines, the ability to repay comes first. Still, a bank must also consider the value of the real estate behind the loan.
That value usually caps the loan through a loan-to-value limit in the lender’s policy. Consider a hypothetical. A lender caps the loan at 70 percent of value, and your building appraises at $3,000,000. The most it would lend is $2,100,000. If you still owe $2,300,000, you would need to bring $200,000 to closing or find another lender.
So a few percent in value can move real money. That’s why it helps to understand what goes into the number before the appraiser shows up.
Your Lender Orders the Appraisal, Not You
This part surprises a lot of owners. The bank picks and engages the appraiser, and federal guidance says it can’t use a report the borrower ordered. Our article on commercial appraisals for lending covers those independence rules in detail.
For a refinance, the practical point is simple. An appraisal you order yourself can help you decide whether refinancing makes sense before you talk to lenders. It just won’t stand in for the appraisal the bank orders for the loan.
When a Refinance May Not Need a New Appraisal
Some refinances skip the full appraisal. Under the OCC’s appraisal rule at 12 CFR 34.43, an existing loan at the same bank can be refinanced without one in either of two cases. In the first, no new money goes out beyond reasonable closing costs. In the second, nothing obvious and material has changed in the market or the property that threatens the bank’s collateral.
The same rule exempts commercial real estate deals of $500,000 or less. In both cases, though, the bank still needs an evaluation, which is a simpler written estimate of market value. A bank can also order a full appraisal anyway, and the guidelines point that way for higher risk loans.
Two more points matter here. Moving the loan to a new lender takes it outside the existing loan exemption, since that exemption only covers credit already at the lending bank. And a cash-out refinance adds new money, so it qualifies only if the market and the property haven’t materially changed. The FDIC and the Federal Reserve have parallel rules for the banks they supervise, and credit unions follow the NCUA’s version.
What Moves the Value of a Leased Building
For most income property, the appraiser leans hard on the income. Our guide to the income approach shows how rent turns into value. Our explainers on net operating income and cap rates cover the two numbers that drive it.
Leases count too. The federal guidelines require lending appraisals to analyze deductions and discounts for partially leased buildings and non-market lease terms. So a half-empty building, or a big tenant paying well under market rent, will show up in the number.
Time plays a part as well. The guidelines list factors that can make an older appraisal stale, including the passage of time, changes in financing terms, lack of maintenance, and shifts in cap rates and lease terms. In other words, what your building was worth at purchase may not be what a refinance lender sees today.
Who occupies the building matters too. If your own company fills the space, our piece on owner-occupied and investment property appraisals explains why the two get valued differently.
How Owners Can Prepare for the Appraisal
You can’t pick the appraiser, but you can make the work go smoother. Have a current rent roll, every lease with its amendments, recent operating statements, and a list of capital improvements ready before the inspection. Our lending article above has a fuller checklist.
A refinance adds one more step. Find your last appraisal and write down what has changed since. A new roof, a lease renewal at a higher rent, or a tenant who moved out are exactly the facts that decide whether the old value still holds. So hand them to your lender early, before anyone has to ask.
One thing to leave out is a target value. The guidelines tell lenders not to give an appraiser a predetermined value, a loan amount, or a target loan-to-value ratio. For what happens next, see what goes into a commercial appraisal report and how long a commercial appraisal takes.
For Lenders, Set Up the Refinance Assignment Right
Bankers already know the ordering rules, and our lending article covers them. A refinance adds two decisions of its own.
First, decide whether the existing appraisal still holds. The guidelines let a bank use an existing appraisal for a later transaction. However, the credit file should show the facts and analysis behind that call, weighed against the staleness factors listed above. So document the check, even on a renewal with no new money that is exempt from a new appraisal.
Second, match the value premise to the new loan. If cash-out proceeds fund a renovation or a lease-up, the guidelines say a bank would generally ask for the as-is value. As applicable, it would also ask for a prospective value upon completion or stabilization.
If the building sits outside Cook County, our Dallas, Philadelphia, Phoenix, and Naples teams take commercial assignments in those markets. In Cook County, our Chicago appraisal team handles the work.
Planning a Refinance on a Building You Own?
Your lender orders the appraisal behind the loan. If you want a supported value first, to plan or before you talk to lenders, PahRoo can prepare one. Bankers can engage us for refinance assignments too.
Frequently Asked Questions
What is a commercial refinance appraisal?
It is an appraisal a lender uses to decide how much it will lend on a new loan secured by income-producing or business property. The appraised value usually caps the loan through the lender’s loan-to-value limit.
Can my bank reuse the appraisal from when I bought the building?
Sometimes. A bank can rely on an existing appraisal for a later loan if it documents why the value still holds. The passage of time, lease changes, or a shift in cap rates can make an older value stale.
Does every commercial refinance need a new appraisal?
No. For an existing loan at the same bank, federal rules may allow an evaluation instead when no new money goes out or when the market and property haven’t materially changed. The bank decides which it needs.
What should I have ready for a commercial refinance appraisal?
A current rent roll, every lease and amendment, recent operating statements, and a list of capital improvements. Plan for access to the whole building, including vacant space.
Does a cash-out refinance need a new appraisal?
Not always. At the same bank, a cash-out refinance can skip a new appraisal only if nothing obvious and material has changed in the market or the property. Otherwise it generally needs one, or an evaluation for smaller loans.
Refinance Appraisals That Hold Up in Credit Review
When a lender needs a value it can underwrite, PahRoo Appraisal & Consultancy prepares commercial appraisals for banks, investors, and owners in Chicago and Cook County, Dallas, Philadelphia, Phoenix, and Naples. Michael Hobbs, MAI, SRA, signs our Illinois reports. See our commercial appraisal services for the property types we cover.