Cash-Out Refinance of a Medical Office Building: Pros and Cons
A cash-out refinance of a medical office building replaces the existing mortgage with a new, larger loan and returns some of the property’s built-up equity to the owners in cash. For physicians who bought their building years ago, paid the loan down and watched the property’s value change, that equity can be a meaningful source of capital for expansion, equipment, debt reduction or other goals.
It is also a decision that increases debt on an asset the practice depends on. Done thoughtfully, it can fund growth at a reasonable cost. Done for the wrong reasons, it can leave the practice and the building more leveraged than they should be. This article walks through how a cash-out refinance works, its pros and cons and what lenders review. Tax treatment and entity structures vary, and nothing here is legal, tax or accounting advice. Review any refinance with your accountant and counsel.
How a Cash-Out Refinance Works
The lender orders an appraisal to determine the building’s current value, then sizes a new loan based on that value, the property’s income and the borrower’s financial profile. The new loan pays off the existing mortgage and closing costs, and any remaining proceeds go to the borrower.
Many physicians own their building through a separate real estate entity that leases the space to the practice. In that case, the lender will look closely at the lease between the two entities and at the practice’s ability to pay rent, because that rent is what services the real estate loan.
Pros of a Cash-Out Refinance of a Medical Office
- Access to capital without selling: owners keep the building and its long-term potential
- Funding for growth: proceeds may help fund a build-out, new equipment or a second internal medicine practice location
- Debt restructuring: proceeds may pay off higher-cost obligations, depending on lender approval
- New loan terms: owners may be able to change the term, rate structure or amortization of the mortgage
- Partner transitions: equity may help fund the buyout of a retiring partner’s share of the building
Cons and Risks
- More debt: a larger loan means larger payments or a longer payoff period
- Closing costs: appraisals, legal fees, title work and lender fees reduce net proceeds
- Prepayment penalties: the existing loan may carry a penalty for early payoff
- Rate exposure: the new loan may carry a higher or variable rate compared with an older mortgage
- Reduced cushion: less equity can make it harder to sell or refinance again if values fall
- Pressure on the practice: if rent is raised to support the new loan, the practice’s cash flow may tighten
Smart and Risky Uses of Proceeds
The value of a cash-out refinance depends largely on how the money is used. Uses that tend to make more sense include investments that can produce revenue or reduce costs over time, such as an expansion, a revenue-producing service line or paying down more expensive debt. Uses that deserve more caution include routine operating expenses or personal spending that does not strengthen the practice.
If you are considering using proceeds to pay off other practice obligations, our guide on how to refinance internal medicine practice debt explains what lenders consider. There is no guarantee that every obligation, including every merchant cash advance, can be consolidated or refinanced, and whether a particular obligation can be included depends on its terms, the business’s cash flow, program rules and lender review.
Financing Options
Conventional real estate loans are frequently used for cash-out refinances of owner-occupied medical buildings. Lenders set their own limits on how much equity can be withdrawn and how the loan is structured. Our internal medicine practice refinancing and debt consolidation page explains how we approach these projects.
SBA programs may also be an option in some situations. SBA 504 loans can, under certain program rules, refinance owner-occupied commercial real estate and may allow some eligible business expenses to be included. Eligibility and terms depend on the business, the borrower, the property, use of proceeds, program rules and lender review. Every loan is subject to approval, and nothing here is a commitment to lend.
You can estimate how different loan amounts and terms affect payments with our conventional loan calculator. Estimates are for planning purposes only and do not represent an offer or approval.
What Lenders Review
Lenders evaluating a cash-out refinance of a medical office typically look at:
- A current appraisal and, in many cases, an environmental review
- The building’s occupancy, including any space leased to other tenants
- The lease between the real estate entity and the practice
- The practice’s financial statements and its ability to cover rent
- The owners’ personal credit and other debts
- How the cash proceeds will be used
- The terms of the existing loan, including any prepayment penalty
A clear explanation of how the proceeds will strengthen the practice can help the request.
Questions to Answer Before You Refinance
- What will the total cost of the refinance be after fees and any penalties?
- How will the new payment affect the practice’s rent and cash flow?
- Would a separate loan for the project, leaving the mortgage in place, cost less?
- How would the plan hold up if revenue dipped or interest rates changed?
Final Thoughts
A cash-out refinance of a medical office building can turn years of equity into capital for growth or debt reduction, but it adds leverage to an asset the practice relies on. Comparing the full cost, understanding how the new payment affects the practice and using proceeds for purposes that strengthen the business can help owners decide whether it makes sense.
US Medical Funding helps physicians evaluate refinancing options for medical office buildings and practice debt. Not every existing obligation will qualify to be refinanced, but we can help you understand which options may fit.
