A loan that performed fine for five years does not refinance itself just because it is time. That used to be close enough to true. The property cash-flowed, the new loan paid off the old one, and everyone moved on. It isn’t that simple anymore. Rates are higher than when most loans coming due today were originated, and lenders are underwriting more conservatively on top of that. Owners who assumed “refinance” meant “replace the loan” are finding out it can mean “replace most of the loan, and bring the rest to closing” — and the owners handling that well are almost always the ones who saw it coming a year out, not the ones scrambling in the final month.
Why the Old Playbook Is Breaking Down
Lenders size a loan off debt service coverage ratio (DSCR) and loan-to-value (LTV), and both numbers get worse when rates go up, even if nothing about the property changed. A property generating the same net operating income it generated three years ago supported a bigger mortgage payment at a lower rate. At today’s rate, that same income supports a smaller payment — which means a smaller loan amount. The property didn’t get worse. The math changed under it. That’s the mechanism by which higher rates work their way into every refinance conversation, and owners who haven’t run the numbers before talking to their lender walk in unprepared for what they’re about to be told.
The numbers make the point. As of this writing, the 10-year Treasury — the benchmark most commercial real estate debt is priced off of — is bumping up against 4.9%, its highest level since 2023. In 2021, when a lot of the loans maturing right now were written, that same benchmark spent most of the year between roughly 1.3% and 1.7%. It climbed through 2022 and finished that year near 3.9%. A borrower who sized a loan against a 1.5% Treasury and is refinancing against a 4.9% one isn’t looking at a modest adjustment. The index alone has roughly tripled, before the lender’s spread is added on top.
The other half of the squeeze is on the expense line, and it gets less attention than it should. Prices didn’t come back down after the inflation spike — they just stopped rising as fast. Inflation ran about 7% in 2021, peaked above 9% in mid-2022, and has moderated since, but the cumulative effect is that the general price level is roughly a quarter higher than it was at the start of 2021. Property-level costs have tracked that and in several categories beaten it: insurance premiums, property taxes on reassessed values, payroll, utilities, repairs, and materials.
That matters because of how DSCR is built. It’s a ratio — net operating income over debt service. Expenses come out before you ever get to the ratio, so every dollar of new cost reduces NOI dollar for dollar. Unless rents have risen by more than expenses have, NOI is flat or down. Now put a higher rate in the denominator at the same time. The two move against you simultaneously — a smaller numerator divided into a larger debt service number — and that compounding is why the supportable loan amount can fall much further than either the rate increase or the expense growth would suggest on its own. Income has to outrun expenses by more than the rate move costs you, and for most properties written in 2021 it hasn’t.
Why Early Beats Late
Every part of this runs better with time and worse under a deadline, because of leverage. A lender looking at a loan maturing in eighteen months is looking at a borrower with options — time to improve income, pay down principal, shop other lenders, or raise capital. A lender looking at the same loan sixty days out is looking at a borrower with one option: whatever the lender offers, on the lender’s timeline. Rate and term flexibility on a modification are almost always better the earlier you ask, and a rushed appraisal three weeks before maturity has no room to reflect improvements you could have made if you’d started sooner. If the answer ends up being a capital call, that process takes months on its own — partners need notice, time to fund, sometimes a formal vote — and you cannot compress that by wanting to. Twelve to eighteen months out is a real target. Sixty days out, you are no longer choosing among options; you are accepting whatever is left.
The Cash-In Refinance: Where the Money Comes From
When the new loan amount the property qualifies for is less than the existing payoff, the owner brings cash to close to cover the difference. That’s a cash-in refinance, and it’s becoming routine — six figures on a mid-size commercial property is not unusual given how far rates have moved.
For a single owner, that cash is personal funds, proceeds from another asset, or a loan secured elsewhere. For a property held through an LLC or partnership, it usually means a capital call — a formal request under the operating agreement for each member to contribute, typically pro rata. This is where well-run ownership groups run into trouble, because most operating agreements were drafted years ago and nobody has looked closely at the capital call mechanics since. Know, before you need one: does the agreement actually require members to fund, or is it optional; what happens to a member who can’t or won’t fund — dilution, a forced buyout, default interest on the unfunded amount; and is there a real notice and process, or just vague language? If a call isn’t realistic, the fallback is the same as for a single owner: outside capital, selling down an interest, or mezzanine debt or preferred equity to fill the specific gap.
Non-Recourse Leverage — and the Bad Boy Carve-Out That Can Erase It
If your loan is non-recourse, you have a card a fully recourse borrower doesn’t: the lender’s alternative to a deal with you is taking back the property, not chasing your personal assets. A lender facing a non-performing loan on a property it doesn’t want to own has real incentive to extend or modify rather than foreclose. A borrower who can credibly say “walk away” has more negotiating room than one asking for grace as a favor — come to the table with a real plan, but don’t negotiate as though you have no alternative when the loan structure says otherwise.
Here is where it gets dangerous. Almost every non-recourse loan has bad boy carve-outs that convert it to full personal recourse if the borrower does specific things — and the ones that matter most in a workout are the ones borrowers trip over without meaning to: filing the entity into bankruptcy to stop a foreclosure, missing a reporting deliverable during a workout, moving property income without lender consent, or transferring an ownership interest — including bringing in new capital through a transfer of membership interests — without consent first. Before you do anything strategic in a workout, check the carve-out list. The leverage non-recourse gives you is real. It evaporates the moment you trigger a carve-out, and it does not come back.
Working It Out With Your Lender
Lenders do not want to foreclose on performing properties, and extensions, modifications, and partial paydowns are things banks do regularly in this environment — for borrowers who show up with a plan, not borrowers who show up in default. Bring numbers, not just a request for more time. If the primary lender still can’t or won’t work with you, the options get more expensive but they exist: bridge loans to buy time, mezzanine debt or preferred equity beyond what a capital call can raise, or seller financing if you’re selling rather than holding. Each carries real cost and its own default mechanics, often with its own guarantee layered on top of the senior loan — price these while you still have leverage, not after a maturity default.
Where State Law Comes In
Indiana’s mortgage foreclosure and deficiency judgment framework is part of why most Indiana banks and credit unions genuinely prefer a modification to a foreclosure on a performing asset — real leverage, but only for borrowers who show up with a plan. If your operating agreement is silent on capital call mechanics, Indiana’s LLC statute supplies minimal default rules that weren’t written with a maturity-driven call in mind — don’t rely on the statutory gap-filler when a well-drafted provision would serve you better. And if your loan carries a personal guarantee, an extension or modification typically requires re-affirming it, sometimes on updated terms — read what you’re re-signing.
Bottom Line
The refinance conversation now starts with a question owners used to skip: does the deal work today, at today’s rate and underwriting standards? Run that analysis twelve to eighteen months before maturity, while you still have leverage with your lender, your capital sources, and the structure of your own loan. If there’s a gap, you have real options — but every one works better with runway than a deadline three weeks away. And if your loan is non-recourse, know exactly what you can lean on, and exactly what not to touch.
If you have a loan maturing in the next 18 months, get the legal and business issues sorted out before deal momentum — or a looming maturity date — makes them harder to fix.
Start with three documents: your loan agreement (maturity date, extension options, carve-outs, reporting covenants), your operating agreement (capital call mechanics and what happens to a member who doesn’t fund), and any personal guarantee. If you’d like a second set of eyes on those before you sit down with your lender, reach out and we’ll walk through them together — while there’s still time for the answers to matter.
Mike Lang is a transactional lawyer who writes weekly for commercial real estate investors and owner-operators navigating the deals that define their portfolios. Questions or topics you want covered? Email Mike.