Cash-Out Refinance

The process by which a borrower takes out a new mortgage with sufficient loan proceeds to pay off the existing mortgage plus return all or part the borrower’s invested capital in the investment. The Cash-Out Refinance is sought by owners of real estate, because it provides them an opportunity to reduce their risk in the property while simultaneously freeing up capital to invest in new opportunities.

Putting ‘Cash-Out Refinance’ in Context

Scenario:

Palmetto Industrial Ventures, a real estate development firm based in the Southeast, identified an underutilized parcel of land near the Port of Charleston, South Carolina. The firm acquired a 10-acre site for $2 million with the intent to develop an Industrial Outdoor Storage (IOS) facility to capitalize on the growing demand for last-mile delivery and logistics solutions near the port.

Development Details:

Palmetto Industrial Ventures invested an additional $1.5 million to prepare the site, which included grading the land, laying gravel for parking, and installing a secure perimeter fence. They leased the entire facility to a large e-commerce company for parking and storage of delivery trucks and containers. This long-term lease added significant value to the property due to the tenant’s strong credit profile and the strategic location near the port.

Property Valuation:

After securing the lease, the stabilized value of Harborview Logistics Yard doubled to $7 million, reflecting the enhanced income stream and strategic importance of the property.

Cash-Out Refinance:

Instead of selling the property to realize gains, Palmetto Industrial Ventures opted for a cash-out refinance. The firm secured a new loan at 60% of the stabilized value, equating to $4.2 million. This loan was used to pay off the original acquisition and development costs, totaling $3.5 million ($2 million for the land acquisition + $1.5 million for site improvements). The remaining $700,000 represented the developer’s returned equity, providing them with fresh capital to reinvest in new projects.

Result:

The cash-out refinance allowed Palmetto Industrial Ventures to recover their initial investment while retaining ownership of a high-performing asset. This strategy reduced their risk exposure, provided liquidity, and positioned the firm for future opportunities in the thriving Southeast industrial market. Additionally, the ongoing rental income from the e-commerce tenant continues to generate stable cash flow, contributing to the long-term value of Harborview Logistics Yard.