Cash-out refinance is replacing an existing commercial mortgage with a new, larger loan and taking the difference, minus costs, as cash. The new loan pays off the old balance, and the borrower pockets the remaining proceeds. It converts accumulated equity into liquid capital without selling the property, usually capped at 65% to 75% loan-to-value.
How Does a Cash-Out Refinance Work?
A cash-out refinance works by sizing a new loan to a percentage of the property's current appraised value, using part of it to retire the existing debt, and releasing the rest as cash after closing costs. The lender caps the new loan at a maximum loan-to-value, so appreciation and paydown since purchase determine how much cash comes out.
Per Avana Capital and FNRP, most lenders cap cash-out refinances at 65% to 70% loan-to-value on owner-occupied commercial property, slightly below the 75% to 80% typical of acquisition financing. The reduction reflects the lender's view that cash-out deals carry marginally more risk because equity is leaving the property. Lenders also require seasoning, commonly 6 to 24 months of ownership, and a debt service coverage ratio that supports the larger payment.
Term | Representative range (2026) |
Maximum loan-to-value | 65% to 75% of appraised value |
Seasoning requirement | 6 to 24 months of ownership |
Minimum DSCR | 1.20x or higher, lender-dependent |
Cash-out rate premium | 25 to 50 bps over rate-and-term |
Common uses of proceeds | Expansion, acquisition, debt consolidation, partner buyout |
Per Lendmire, cash-out pricing adjustments typically add 25 to 50 basis points to the par rate, because the lender is advancing capital against equity rather than simply re-terming existing debt. The cash-out formula is direct: appraised value multiplied by the maximum loan-to-value, minus the existing loan balance and closing costs, equals net cash to the borrower.
Why Cash-Out Refinance Matters
Cash-out refinance matters because it lets an owner recover invested equity without triggering a taxable sale. Proceeds from a refinance are loan proceeds, not gain, so they are generally not taxed at receipt. That distinction lets a sponsor redeploy capital into a new acquisition, fund capital improvements, or buy out a partner while keeping the appreciating asset.
The trade is added leverage and a higher payment. Per Lendmire, a cash-out refinance carries a 25 to 50 basis point rate premium over a rate-and-term refinance, and the larger balance raises annual debt service. If the new payment compresses the debt service coverage ratio below the lender's floor, the deal will not size, regardless of available equity.
The quotable point for an operator: a cash-out refinance turns paper equity into deployable cash, but every dollar pulled out is a dollar of new debt the property's cash flow must carry.
Example
An investor owns a stabilized retail property appraised at $3,000,000 with a remaining loan balance of $1,200,000. The lender offers a cash-out refinance at 70% loan-to-value. Closing costs total $60,000. The calculation below shows the net cash released.
Item | Calculation | Result |
Appraised value | Given | $3,000,000 |
Maximum loan-to-value | Given | 70% |
New loan amount | 70% x $3,000,000 | $2,100,000 |
Existing balance paid off | Given | $1,200,000 |
Closing costs | Given | $60,000 |
Net cash to borrower | $2,100,000 - $1,200,000 - $60,000 | $840,000 |
The investor walks away with $840,000 in cash and a new $2,100,000 loan. If the property produces $190,000 in net operating income and the new loan carries annual debt service of $150,000, the debt service coverage ratio is $190,000 divided by $150,000, or 1.27x, above a typical 1.20x floor. The refinance sizes, and the $840,000 can fund the next acquisition.
Variations and Edge Cases
Cash-out refinances are not uniform: leverage, seasoning, and use-of-proceeds rules shift with the loan program and the property. The table below covers the variants an operator should confirm before ordering an appraisal.
Variant | Treatment |
Owner-occupied vs investment | Investment properties often cap lower and price higher than owner-occupied |
SBA-eligible refinance | SBA 504 cash-out typically requires 24-plus months seasoning and tighter use-of-proceeds rules |
Delayed financing | Some programs waive seasoning for recent all-cash buyers who can document the purchase |
Appraisal risk | If the appraisal comes in low, the loan sizes to the lower value and cash out shrinks |
DSCR ceiling | Proceeds are capped by the payment the property's cash flow can cover, not just by LTV |
The most common mistake is assuming maximum loan-to-value is the binding constraint. Often the debt service coverage ratio is. A property with strong appreciation but thin cash flow may hit its DSCR floor before it reaches the LTV cap, which limits proceeds below what the equity alone would allow.
Cash-Out Refinance vs Rate-and-Term Refinance
Cash-out refinance is often confused with a rate-and-term refinance, and both replace an existing loan, but they serve different purposes. A cash-out refinance replaces the old loan with a larger one and returns equity as cash to the borrower. A rate-and-term refinance replaces the old loan with one of a similar balance to lower the rate or extend the term, returning little or no cash.
Per Lendmire, the practical line is the proceeds: a refinance is treated as cash-out when the borrower receives more than a nominal amount, while a rate-and-term refinance nets roughly zero or requires cash to close. Rate-and-term refinances have no seasoning restriction and price lower, while cash-out refinances add a rate premium and often require 6 to 24 months of ownership first.
Frequently Asked Questions
What is a cash-out refinance in commercial real estate?A cash-out refinance in commercial real estate is replacing an existing mortgage with a new, larger loan and taking the difference, minus costs, as cash. The new loan retires the old balance, and the borrower keeps the remaining proceeds, usually capped at 65% to 75% loan-to-value.
What is the maximum LTV on a cash-out refinance?Most lenders cap a commercial cash-out refinance at 65% to 70% loan-to-value on owner-occupied property and up to 75% on some investment properties. That is generally 5 to 10 percentage points below acquisition financing, reflecting the added risk of equity leaving the property.
Are cash-out refinance proceeds taxable?Cash-out refinance proceeds are loan proceeds, not sale gain, so they are generally not taxed at receipt. This lets an owner recover invested equity without triggering a taxable sale, though it adds debt the property's cash flow must service.
How much seasoning does a cash-out refinance require?A commercial cash-out refinance commonly requires 6 to 24 months of ownership seasoning before the equity can be pulled. Some DSCR programs allow 6 months or less, while SBA 504 refinancing typically requires 24-plus months and follows tighter use-of-proceeds rules.
Related Terms
Loan to Value Ratio
Debt Service Coverage Ratio
Net Operating Income
Bridge Loan
Permanent Loan