The Refinance Cliff: What Happens When Cheap Debt Runs Out

Between 2020 and 2021, commercial property owners borrowed billions of dollars in floating-rate bridge loans at 3.2% interest rates. Those loans had 3-year and 5-year maturities.

Those maturities are coming due today. And the replacement financing costs 6.5% to 7.2%.

Here is the real math on a 72-unit apartment building. Under the old 3.2% loan, monthly debt service was $14,800. At today's 6.8% rate, monthly payments jump to $28,900. That is an extra $169,000 per year out of pocket.

If the building does not produce massive extra cash flow, the owner cannot refinance without writing a huge check to pay down the principal balance.

How We Prepare

• Model a +250 Bps Refinance Spread: We always assume replacement financing will cost 250 basis points more than prevailing rates.
• Maintain Dedicated Principal Sinking Funds: We escrow 15% of annual operating cash flow into short Treasury bills to fund debt paydowns at maturity.
• Refuse Floating-Rate Debt: Never accept floating-rate loans without buying long-term interest rate caps at closing.

Debt is like fire. Used with discipline, it accelerates wealth. Used carelessly, it burns down the house.