The Refinancing Gap

Why the loan you need and the loan the property supports may be different

Refinancing Is a New Lending Decision

For many commercial real estate borrowers, refinancing begins with a simple assumption: there is an existing loan balance approaching maturity, and the new lender will refinance it.

That assumption can create problems.

A maturing loan reflects a financing decision made years ago. Interest rates, property values, capitalization rates and operating performance may all have changed since the loan was originated. The new lender does not inherit the economics of the existing loan. It underwrites the property as it exists today.

Greater Capital Availability Does Not Mean Greater Leverage

Greater availability of capital does not necessarily mean greater leverage. CBRE reported that average commercial LTV ratios for fixed-rate permanent loans were 59.6% in the second quarter of 2026, compared with 60.8% a year earlier, even as lenders continued to compete aggressively on pricing.

Cash Flow Can Create a Refinancing Gap

Cash flow is one potential source of a refinancing gap. A property that comfortably supported its existing debt when interest rates were lower may not support the same principal balance at today’s debt-service requirement. A lender may size proceeds to a minimum debt service coverage ratio or debt yield regardless of the amount necessary to repay the existing mortgage.

Collateral Value Can Reduce Loan Proceeds

Collateral value creates another potential gap. The difference between a borrower’s expected value and the completed appraisal does not need to be dramatic. A relatively modest valuation adjustment, when multiplied by the lender’s maximum LTV, can reduce loan proceeds by $1 million or more. A refinancing that appeared adequately supported when initially presented can require additional borrower equity once the appraisal is completed.

A Cash-Neutral Refinancing Requires More Than the Loan Balance

There is also a less obvious source of the refinancing gap: the amount required to complete a cash-neutral refinancing is greater than the existing loan balance. In addition to repaying the current lender, proceeds may be needed for lender origination fees, mortgage-broker fees, reserves, legal and title expenses, and other closing costs. On a sizable commercial mortgage, these items can easily add another $1 million or more to the amount required to close.

The Combined Effect Can Be Significant

The combined effect can be significant. A borrower with a $20 million mortgage may actually need $21 million or $22 million to complete a cash-neutral refinancing, while current cash flow or appraised value may support something less. The resulting gap does not necessarily mean financing is unavailable. It means the existing capital structure cannot be refinanced in its entirety without additional borrower capital.

Address Refinancing Risk Before Maturity

This is why refinancing risk should be addressed well before maturity. Time allows a borrower to develop realistic expectations of value and loan proceeds, understand potential closing costs and reserves, and determine whether additional equity may be required. Discovering a refinancing gap shortly before maturity leaves considerably fewer options.

A refinancing is a new credit decision based upon today’s property performance, today’s valuation, today’s capital markets and today’s borrower, not the amount of the existing mortgage.