The refinance gap, explained in one table

There is a version of the 2026 refinance conversation that takes two hours and a stack of spreadsheets, and there is a version that takes one table. Both end in the same place. Owners who understand the one-table version see the number early and keep their options. Owners who wait for the two-hour version find out from their lender, in the last quarter before maturity, and choose from what is left.

Two constraints, one answer

Every commercial lender sizes a loan against two ceilings. The first is loan-to-value: the loan cannot exceed a percentage of the property's appraised value, usually 60 to 70 percent for a stabilized asset in this rate environment. The second is debt-service coverage: net operating income must cover the annual debt service by a comfortable margin, usually 1.20 to 1.30 times. The lender runs both calculations. The smaller answer is the loan. That is the whole model.

A worked example

Assume a stabilized property producing $700,000 of NOI, currently financed at $8.0 million, maturing in 2026. At a 6.75 percent cap rate the property values at roughly $10.37 million. Apply a 65 percent LTV ceiling and the lender is willing to write about $6.74 million on value alone. Apply a 1.25 times DSCR floor at a new 6.75 percent rate on 30-year amortization and the lender can support about $7.19 million on cash flow.

The smaller number wins. Maximum proceeds are $6.74 million. The current payoff is $8.0 million. The gap is $1.26 million — cash the owner must bring, structure into subordinate capital, negotiate away, or plan around. That gap did not exist when the loan was originated at 3.5 percent against a 5 percent cap. It exists now because both constraints tightened at once.

Why the gap is not a failure

A refinance gap is not a distressed asset. It is a math result. Rates roughly doubled, cap rates widened, and lenders returned to constraints they had loosened during the cycle. Every asset touched by that combination has a gap. The relevant question is not whether the gap exists; it is what the owner does with the eighteen months before maturity.

Five paths, none of them a surprise

• Cash-in refinance. The owner writes a check for the gap. Cleanest, most expensive to equity, works when the sponsor has liquidity and conviction in the asset.
• Structured capital. A mezzanine loan or preferred equity fills the gap. More expensive than senior debt, cheaper than dilutive equity.
• Bridge, then perm. A short-term loan buys time to grow NOI, sell a piece, or wait out rates. Right when the underlying story is strong and time is the only missing input.
• Armed renewal. The current lender is often willing to extend on better terms when a real market alternative is on the table. Term sheets sharpen conversations.
• Sale. Sometimes the honest answer. Better to sell into a chosen window than a forced one.

The eighteen-month rule

None of these paths take three months. Structured capital needs a package. Bridge lenders need a plan for the exit. Renewals need leverage. Sales need a market. Eighteen months out is when all five paths are open. Six months out, one or two remain, and neither is priced the way it would have been.

One table, three numbers — NOI, payoff, and a target rate — and an owner already knows more than most sponsors do at maturity. The rest is execution.