Office Refinancing: DSCR Gap, Expiring Cap, and Rollover
You asset-manage a 120,000 SF office building with NOI of $2.1 million. A $24 million interest-only loan at 4.8% matures in 12 months. The property appraises at $30 million. A lender quotes a new 30-year amortizing loan at 6.5% with a 1.25x DSCR, 9.0% debt yield, and 65% maximum LTV. The current interest rate cap expires in six months. Two tenants representing 18% of rent roll expire within 14 months. The owner wants a $3 million cash-out at refinance to fund another project. The current reserve is $250,000. Annual debt service on the existing loan is $1.152 million. Property taxes are expected to rise 6%. Leasing costs for the rollover are estimated at $1.4 million.
1. Calculate the maximum refinance proceeds under each lender test and identify the funding gap. Can the owner take $3 million out?
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Current and new debt service
Current interest: $24M × 4.8% = $1.152M; DSCR = 2.1 / 1.152 = 1.82x.
New loan at 6.5%, 30-year amortization: annual constant ≈ 7.585%. Payment on $24M = $1.820M. DSCR = 2.1 / 1.82 = 1.15x. Debt yield = 2.1 / 24 = 8.75%. LTV = 24 / 30 = 80%.
Lender maximums
- DSCR: 2.1 / 1.25 = $1.68M debt service; $1.68M / 0.07585 = $22.15M.
- Debt yield: 2.1 / 0.09 = $23.33M.
- LTV: 0.65 × $30M = $19.5M.
Binding constraint is LTV at $19.5M. The owner cannot take $3M out; there is a $4.5M shortfall against the $24M balance. The owner must pay down $4.5M or accept a smaller loan. Options include equity paydown, mezzanine debt, a sale, or negotiating a lower rate. Do not assume appreciation will close the gap.
2. How should the expiring rate cap and tenant rollover affect the refinancing recommendation?
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If the new loan floats, a 200 bp rise adds about $480,000 of interest, cutting DSCR from 1.15x to roughly 0.88x. Buy a cap or swap before closing and budget the cost. The 18% rollover plus $1.4M of leasing costs should be stress-tested with six months of downtime. Recommend early renewals, a $1.4M leasing reserve, and a covenant test that includes rollover. Do not refinance on stabilized NOI if near-term expirations are not addressed.
3. What should the lender package include, and how do you handle the owner's cash-out request?
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Include rent roll, lease expirations, tenant credit, capex history, environmental reports, three-year cash flow, and a downside scenario. Disclose the cash-out request and show the LTV constraint. Present a cure plan: paydown, reserve funding, and renewal progress. If the owner refuses, document the advice and the refinancing risk.