Refinancing existing debt can be justified for a number of reasons. First, lower interest rates can reduce monthly payments while leaving the term of a note the same. This pays off the note over the same period of time but improves the center’s cash flow. Second, lowering the interest rate and reamortizing the loan can reduce payments even further. Although this structure extends the term of the loan, it can provide the lowest possible payments. Finally, there are times when the building and/or equipment need to be upgraded and the cash flow has not been good enough to pay for the upgrades without new debt. It may be possible to refinance existing debt, extend the term, pay for the upgrades, and keep the monthly payments near to the previous payments.
One of the risks that banks evaluate on purchases is the potential for problems when management changes. A refinance does not run this risk since there is a continuity of management. If a center has been consistently showing good cash flow and profits the borrower may have an easy time qualifying for a new loan. However, if revenue, cash flow, and profits have been up and down, many bankers will be reluctant to make a new loan to a business that may have future with making the payments on time. In this case a borrower will need to explain the trends and the causes of the inconsistencies.
Although most loan costs can be financed into a new loan, these costs can be significant. Bank loan fees, appraisal costs, title insurance, environmental reports, and prepayment penalties on the old loan are all costs that must be considered before making the decision to refinance.