The CRE Refinance Gap: A Practical Framework for Owners, Lenders, and Asset Managers
A property owner in the United States has a loan maturing in nine months.
The property is leased. The asset still produces positive cash flow. The owner has managed the property carefully and may even have grown NOI since acquisition. On the surface, there is no obvious crisis.
Then the refinance quotes come in.
The existing loan balance is $25 million. The new lender is willing to provide $19 million. After financing costs, reserves, and closing expenses, the owner needs to bring in more than $6 million to close the refinancing.
That is the refinance gap.
For many U.S. commercial real estate owners, this is the real issue sitting behind an upcoming loan maturity. The question is no longer limited to whether a lender will provide a loan. The more relevant question is how much debt the property can support today, how that compares with the full loan payoff, and what capital or strategy is required to bridge the difference.
This matters at scale. Approximately $875 billion of U.S. commercial and multifamily mortgage debt is scheduled to mature in 2026. A meaningful portion of those loans originated when borrowing costs were lower and property values were supported by a different capital markets environment.
The maturity date arrives
Consider a typical acquisition completed several years ago.
The property may have been financed at a 3% to 4% coupon. The owner underwrote a five or ten year hold, expected cash flow to improve, and anticipated a conventional refinance at maturity. At the time, that plan may have looked entirely reasonable.
Today, the same loan may need to be refinanced at a rate closer to 6% or 7%, with lower leverage and more conservative lender underwriting. Even where a property continues to perform, the new annual debt service can be materially higher. This reduces the amount of proceeds available under a lender’s DSCR test.
At the same time, a higher capitalization rate, slower rent growth, vacancy, upcoming tenant rollover, or capital needs can reduce the value used by the lender for loan sizing.
The result is simple: the maturing loan balance may exceed the debt capacity available today.
Some owners see the problem first through the valuation. Others see it through debt service coverage. A lender may also focus on debt yield, sponsor liquidity, reserve requirements, tenant concentration, remaining lease term, or the condition of the asset.
Every refinance is asset specific. The framework for evaluating the situation, however, can be consistent.
Start by quantifying the gap
The refinance gap should be visible in one clear calculation:
Refinance Gap=Existing Loan Payoff + Transaction Costs−Net New Loan Proceeds
The existing loan payoff is more than just the outstanding principal balance. It can include accrued interest, extension costs, prepayment costs, lender fees, required reserves, and closing costs.
The new loan proceeds should also be calculated on a net basis. If a new lender offers a $20 million loan but requires $500,000 of reserves and financing costs are $300,000, the usable capital is lower than the headline loan amount.
Here is a simplified illustration:
This calculation does not provide the answer on its own. It gives the owner, lender, and asset manager a common starting point.
Without this number, refinance discussions often remain vague. With it, the conversation becomes more productive. The team can assess whether the gap should be funded with new equity, addressed through an extension, supported by a recapitalization, or compared against a sale.
The lender will size to the lowest result
A common modeling mistake is to assume refinancing proceeds based only on loan to value.
In the current U.S. debt market, lenders generally look at several constraints. The final loan amount is often the lowest result generated by those tests.
Loan to value
The lender starts with a value estimate, often based on a stabilized or underwritten NOI divided by a market supported capitalization rate.
Value=Stabilized NOI / Capitalization Rate
The loan to value test then applies the lender’s maximum leverage percentage to that value.
A property worth $30 million at 65% LTV may support a $19.5 million loan. If the same property is valued at $35 million, that capacity increases to $22.75 million.
Value matters. It also needs to be supportable.
Debt service coverage ratio
DSCR asks whether the property’s NOI can cover annual debt service with sufficient cushion.
A lender may require a 1.20x or 1.25x DSCR, depending on asset type, loan structure, sponsor, and market conditions. Higher rates or shorter amortization can push annual debt service higher, reducing the loan amount even when value appears healthy.
This is why a property can have a reasonable LTV and still fail to generate enough refinance proceeds.
Debt yield
Debt yield compares property NOI with loan amount.
Debt Yield=NOI / Loan Amount
It provides the lender another way to assess the income support behind the debt.
Where debt yield becomes the binding constraint, a property with lower or uncertain NOI may support materially less leverage than an LTV calculation suggests.
Other underwriting constraints
The lender’s credit view may also reflect:
Lease rollover and tenant concentration
Vacancy and projected downtime
Capital expenditure needs
Tenant improvements and leasing commissions
Sponsor liquidity and guarantor strength
Property type and market location
Loan term, amortization, and reserve requirements
The practical modeling approach is to run each sizing test and use the lowest loan amount as the expected refinance capacity.
That number should guide the refinance plan.
Why the base case is only the beginning
The base case is helpful. It is rarely enough.
A refinance model should show how the debt capacity changes when key assumptions move. In the U.S. market, this is particularly important for office assets, transitional properties, assets with meaningful lease rollover, and properties requiring capital investment before stabilization. Elevated borrowing costs, lower values in some sectors, and tighter underwriting standards have made these assumptions more consequential.
The most useful sensitivities usually include:
NOI below the original forecast
A higher refinance capitalization rate
A higher loan coupon
A lower maximum LTV
Delayed leasing or tenant rollover
Additional TI, LC, or capital expenditure requirements
More conservative lender DSCR or debt yield thresholds
For example, a property may refinance comfortably at a 6.25% rate and a 6.0% cap rate. If the rate moves to 6.75% and the lender underwrites a 6.5% cap rate, the available proceeds may decline sharply.
That is why refinance planning should include at least three scenarios:
The objective is to understand the range of possible outcomes well before the maturity date. That gives the owner time to make a considered decision rather than react under pressure.
Finding the real constraint
A strong refinance model helps identify the specific issue creating the gap.
For one property, the binding issue may be valuation. The asset value may have declined, reducing LTV capacity.
For another, the property value may be acceptable while the debt service burden constrains proceeds under DSCR.
For a third, the lender may be concerned about a large tenant expiration, upcoming capital expenditure, or uncertainty around the business plan.
Each issue leads to a different response.
An owner facing a temporary NOI issue may benefit from additional time to lease vacant space, complete renovations, or burn off concessions. An owner facing an LTV shortfall may need fresh equity, a recapitalization partner, or a structured capital solution. If the business plan no longer supports the asset’s debt burden, a sale or negotiated restructuring may create a better economic outcome.
The model should separate these issues clearly. A generic answer is rarely useful.
The decision framework
Once I know the size of the gap and what's driving it, I can put the real options in front of a client on consistent terms. I've built these models enough times now to know there's no default answer — the right path depends entirely on what's underneath the number.
Refinance with new equity
Sometimes the cleanest answer is also the simplest: the sponsor funds the gap.
I lean toward recommending this where the business plan is still credible, the sponsor has capital on hand, and the value creation ahead justifies putting more in.
When I model this scenario for a client, I want them looking at the required contribution, the resulting debt service, and how the downside case treats that new money — before they commit it.
Extend the existing loan
An extension buys time for leasing, for stabilization, for the market to move.
But I never let a client treat "extend" as a free option. Extension fees, rate step-ups, new reserves, cash management, paydown requirements — I run all of it through the model, because time bought at the wrong price can leave a sponsor worse off than facing the gap head-on today.
Bring in new capital
A JV partner, preferred equity, mezz - I've used all three to bridge a gap without forcing a sale.
It keeps ownership intact, but it also reshapes the capital stack, and I want a client to see exactly how that new capital gets repaid, where it sits in the waterfall, and what's actually left for existing equity once I stress-test it.
Sell the property
I don't treat this as a failure case. Sometimes it's the most disciplined move on the table, especially when the required equity check is large relative to the upside, or the forward plan carries too much uncertainty.
When I build a sale analysis, I want broker costs, loan payoff, any tax exposure, and pre-sale capital needs all in the same model, with a real range of price outcomes rather than one optimistic number.
Restructure the debt
Sometimes the best conversation isn't with a new lender, it's with the existing one.
I've seen lenders agree to extensions, partial paydowns, added collateral, or revised terms when the borrower comes in with a credible model rather than just a request.
That's usually the difference between a negotiated outcome and a forced one.
There's no universal right answer here. The asset, the loan documents, the sponsor relationship, and what I'm seeing in the capital markets that quarter all shape which path makes sense - which is exactly why I build a fresh model for every situation instead of reaching for a template.
Build the model before urgency takes over
The best time to build a refinance model is not two months before maturity.
Owners and asset managers should begin their analysis well in advance, ideally 12 to 18 months before the maturity date. That window allows the team to improve reporting, validate lease assumptions, address operating issues, gather lender feedback, explore capital sources, and decide whether a sale process should begin.
For lenders, a well-built model provides a more reliable view of borrower risk. It helps distinguish between an asset with a short-term capital need and one with a deeper structural issue.
For owners, it creates options.
The current U.S. refinance cycle will produce different outcomes across office, multifamily, industrial, retail, hospitality, and specialty assets. Capital remains available, but lenders are more selective and underwriting has become more focused on sustainable cash flow, property quality, and execution risk.
A refinance gap does not automatically mean a distressed outcome. It means the capital structure needs closer attention.
The right model brings the key questions into one place: What is the full payoff? How much debt can the property support? What creates the difference? How much new capital is required? And which option preserves the most value under realistic assumptions?
That is where the refinance conversation should begin.
This is exactly the kind of gap analysis I build at RealAsset Edge for owners, asset managers, and lenders working through live maturities - custom models that pressure-test a specific asset against real lender constraints, not rules of thumb. If you've got a loan maturing in the next 12–18 months and want a second set of eyes on the numbers, reply to this newsletter or send me a message. And if you've closed a refinance gap recently, I'd genuinely like to hear how - drop it in the comments.
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