Your refinance is decided about a year before the balloon, by the NOI in place when the appraiser arrives. At today's terms every dollar of NOI is worth about $8.70 of loan, so a $48,000 lease signed early is worth $419,000 at closing.
The maturity date in your loan documents is a year late. Your refinance is decided about twelve months before the balloon comes due, by the NOI you have in place when the appraiser shows up. After that, the only thing left to negotiate is how much cash you bring to closing.
Most owners start thinking about the refinance when the servicer's letter arrives. By then the rent roll is fixed, and the rent roll is what the lender is going to size the loan against.
The payment barely changed. What it buys did.
Take a 30,000 square foot unanchored center. In March 2018 the owner borrowed $5.0 million at 4.25% on a 30 year schedule with a 10 year term. NOI was $450,000 and coverage was a comfortable 1.52. The loan matures in March 2028. It is now September 2026.
Last year a 3,000 square foot tenant left and NOI fell to $395,000. The balance due at maturity will be about $3.97 million.
A lender sizes the new loan with three tests and lends the smallest answer. We covered how they work in the three numbers your lender actually uses. Run them at illustrative terms: 7.0% on a 25 year schedule, 1.35 coverage, 70% loan to value at an 8.0% cap rate, a 9.5% debt yield floor. Get real quotes for your own center.
- Payoff at maturity
- $3.97M
- NOI today
- $395,000
- New loan
- $3.45M
- Gap
- $522,000
Coverage allows $3.45 million. Loan to value allows almost exactly the same, $3.46 million. Debt yield would allow $4.16 million. The owner is about $522,000 short.
The new loan's payment would be about $292,600 a year. The old one is $295,200. Same payment, $522,000 short of the payoff. Nothing about the building got worse except one empty suite, and the rate did the rest.
The 8.7x rule: a lease signed now is worth $419,000 at closing
With coverage binding at these terms, every dollar of NOI in place at the appraisal supports about $8.73 of new loan. Call it the 8.7x rule. It changes how you should look at the vacancy.
Lease the empty 3,000 square feet at $16 net and NOI rises by $48,000, to $443,000. That supports about $419,000 more loan. The gap falls from $522,000 to about $103,000.
Read that the other way. The $48,000 of annual rent you are not collecting is costing you $419,000 of loan proceeds, and the bill comes due on a specific date. An owner holding out an extra dollar a foot on that suite is protecting $3,000 a year of rent and risking a six figure check at closing.
The rule only works if the tenant is open and paying when the lender underwrites. A lease signed at month 3 with six months of free rent is not NOI yet. A lease signed at month 15 is. The same goes for renewals: a tenant expiring in the first two years of the new loan will be discounted or reserved against, so renewing them early is worth real money. So is fixing the deferred maintenance an inspector would flag, because it becomes a required repair or a reserve inside the new loan.
The rule moves with the terms. At a different rate or coverage minimum, work out your own multiple. It will still be large.
Nobody is paid to warn you early
Your servicer is not going to call at month 18. Its job is to collect payments on the loan you have. A borrower who arrives at maturity short is a borrower who pays for an extension, accepts a paydown and signs tighter terms, because by then there is no leverage left on the borrower's side of the table.
The new lender has its own incentive. The term sheet will say "up to." The appraisal, the rent roll and the third-party reports decide the rest, and they arrive after you have paid the deposits. Treat the quoted amount as a ceiling and run the three tests yourself before you sign.
None of this is bad faith. It is just that the only person paid to start early is you.
When leasing can't close it, the gap has a price
Some gaps do not close with leasing. The rest gets filled by someone, and the price rises roughly in this order.
Your own cash. The cheapest capital you have. $103,000 is a check. $522,000 may not be.
An extension or modification. Read the note for extension options first; they usually carry conditions such as no default, a minimum coverage and a fee. Without one, ask anyway, and ask at month 12. A lender with a performing loan often prefers an extension to chasing a payoff, but expect a fee, a paydown or a higher rate.
Bridge or private debt. Short, interest only and expensive. It buys time to finish leasing. Know how you exit before you sign, because the maturity problem comes back fast.
Mezzanine debt or preferred equity. These sit between the first mortgage and your equity in the capital stack. They cost far more than senior debt, preferred equity can take control if targets are missed, and both can be hard to find at this size.
A partner, or a piece of the site. Sell a share of ownership, or sell an outparcel with your lender's release. No payment, but a permanent share of every future dollar or a smaller property.
Sell. At the refinance numbers the center is worth about $4.94 million, leaving about $965,000 of equity before selling costs. Selling at month 12, with a full marketing period, is a strategy. Selling at month 2, with a deadline every buyer can see, is a discount. If you sell, check whether the loan can be assumed: a buyer taking over 4.25% money is buying something the market no longer offers, and a loan assumption can be worth real money in the price. Our exit options page walks through what each path nets.
If the best move is to refinance or sell before maturity, price the way out of your current loan first. Bank loans often carry a step-down penalty. Yield maintenance charges roughly the interest the lender loses, measured against Treasury yields, and shrinks toward the note's minimum when those yields sit above your rate. CMBS loans often require defeasance. Most loans also have an open window near maturity; know its date.
Month 12 is your real maturity date
Leasing done before month 12 has time to become paying NOI before the appraisal. Leasing done after it mostly does not. From there it is execution: term sheet, appraisal, a Phase I environmental site assessment, a property condition report, then commitment, estoppel certificates, title and the payoff letter. Estoppels depend on tenants signing and returning them, so send them early. And have three years of operating statements, the trailing twelve months, a clean rent roll, every lease and your personal financial statement ready before the first lender call.
Before the letter arrives
An hour now replaces the scramble later.
- Find the maturity date, prepayment clause, open window and extension options in your loan documents.
- Ask your servicer for the projected balance at maturity.
- Take trailing twelve month NOI, adjusted for anything that will not repeat, and run the three tests at today's terms.
- Subtract the smallest answer from the payoff. That is your gap.
- Work out your multiple: the loan one dollar of NOI supports at your quote. Divide the gap by it. That is the NOI you need to close the gap with leasing.
- List every vacancy and every lease expiring within two years of maturity, and price them against that multiple, not against last year's asking rent.
- Put month 12 on the calendar as the day you decide: refinance, extend or sell.