Refinancing Assumptions in a Hold Model: Where Investors Get Them Wrong

Models that assume a refinance partway through a hold often assume away the conditions that make one possible. These are the errors and the tests that expose them.

A refinancing assumption is a forecast that, at a future date, a lender will advance a stated amount against your building on stated terms. Everything in that sentence is a prediction: the lender, the amount, the terms and the willingness. Models frequently treat it as a certainty, often because the alternative is admitting that the facility matures before the planned exit. These are the errors that follow.

Why these keep happening

Refinancing assumptions enter a model as a technical necessity rather than a commercial decision. The facility term is shorter than the hold, so a line is added to roll it over, and attention returns to the asset. Nobody asks what the building will look like on that date, what a lender will then be willing to advance, or what happens if the answer is less than the amount outstanding.

1. Assuming the same loan amount will be available again

A future advance is sized against the building's value and income at that time, not against the amount you currently owe. If income has softened, if market pricing has widened, or if lenders have become more cautious about that asset type, the amount available will be lower. The gap between the maturing balance and the new advance has to be funded with equity you may not have planned to commit.

• Avoid it by: Size the refinance from modelled value and income at the refinance date, using a conservative advance ratio, and show the resulting funding gap explicitly.
• Proof it is closed: A refinance block showing projected value, the assumed advance ratio, the maturing balance and the gap.

What it costs you: An unplanned equity requirement at a moment when the asset is least able to support it.

2. Refinancing at the same cost of debt

Models frequently roll the existing rate forward because no better assumption is available. The cost of debt at a future date depends on conditions nobody can forecast, and because a refinance usually falls partway through a hold, the assumption affects several years of cash flow and the cover ratio in each of them.

• Avoid it by: Test the refinance at a materially higher cost as well as at the current one, and check cover in the first year after the refinance in both cases.
• Proof it is closed: A sensitivity showing cover and return in the years following a refinance at two or three cost levels.

What it costs you: A levered return that depends on a financing cost assumption carried forward without examination.

3. Ignoring the cost of refinancing itself

A refinance carries arrangement fees, a fresh valuation, legal costs on the new security, possibly an early settlement cost on the existing facility, and the professional time of running the process. These are real cash outflows in a single year, and they are routinely omitted because the model treats the refinance as a change of label on a balance.

• Avoid it by: Include an explicit refinancing cost line and confirm the actual fee structure with the lender rather than estimating it.
• Proof it is closed: A refinance cost schedule listing each fee with its source.

What it costs you: A cash shortfall in the refinance year that was never budgeted.

4. Timing the refinance for the model's convenience

Refinances get placed in whichever year makes the cash flow work, rather than when the facility actually matures. In reality the date is contractual, and a lender will start the conversation well before it. Placing the event late in the model also conceals the period during which the asset must be presentable and performing in order to refinance at all.

• Avoid it by: Place the refinance on the contractual maturity date and begin the process in the model several months earlier.
• Proof it is closed: A facility schedule showing maturity dates and the modelled refinance aligned to them.

What it costs you: A model that never tests the asset's condition and performance at the moment refinancing actually depends on them.

5. Assuming a refinance can release equity

Models sometimes assume the refinance advances more than the maturing balance, returning cash to the investor and improving the return. This requires value to have risen enough to support a larger advance at an acceptable ratio, which is a forecast stacked on a forecast. Where the release is material to the return, the deal depends on market appreciation rather than on the asset.

• Avoid it by: Model the base case with no equity release and treat any release as upside, shown separately.
• Proof it is closed: A base case in which the refinance advance does not exceed the maturing balance.

What it costs you: A return that collapses if the asset merely holds its value instead of rising.

6. Forgetting that a refinance resets the covenants

A new facility brings new covenants, which may be tighter than the ones you have become used to, and new conditions on distributions, reserves and reporting. A model that carries the old covenant tests forward will show compliance that the new documents would not produce, and the practical restrictions on cash may be very different.

• Avoid it by: Model the post-refinance years against conservative covenant assumptions and test distributions against them.
• Proof it is closed: A post-refinance covenant test built into the model rather than carried forward from the old facility.

What it costs you: Distributions assumed in the model that the new facility would not permit.

7. Treating a refinance and a sale as interchangeable

If refinancing fails, the fallback is usually a sale, and investors assume that is an acceptable alternative. But the conditions that make refinancing difficult, softer income and more cautious capital, are the same conditions that make selling difficult and expensive. The two options are correlated, so holding one as a backstop for the other provides much less protection than it appears to.

• Avoid it by: Model the failure case as a forced sale in a weak market with a wider exit yield and a longer sale period.
• Proof it is closed: A documented contingency showing the outcome if neither refinancing nor a timely sale is available.

What it costs you: A fallback plan that is unavailable precisely when it is needed.

A short check before you sign

• The refinance is placed on the contractual maturity date rather than a convenient year.
• The new advance is sized from projected value and income, not from the maturing balance.
• A funding gap, if any, is shown explicitly with its source of equity.
• Refinancing costs appear as a cash line with fees confirmed rather than estimated.
• The base case assumes no equity release and any release is shown separately as upside.
• A failure case models a forced sale in the same conditions that caused the refinancing to fail.

If it has already happened

If you are holding an asset with a maturity approaching and a model that assumed the roll would be straightforward, start the work early. Obtain an indicative view from more than one lender, update the valuation evidence, bring the capital schedule and the rent roll into presentable order, and quantify the funding gap under a conservative advance. Early knowledge of a gap gives you options, including a partial sale, additional equity or an extension request, while late knowledge leaves only the expensive ones. Lending terms and product availability change over time and vary by borrower, so confirm them directly rather than relying on the terms you obtained previously.

Domira builds the numbers on a Saudi property with you before you commit: rent and cost evidence, condition and capital expenditure, the appraisal and the sensitivities that decide whether the deal survives a bad year. The investment decision stays yours, and so does the advice of your licensed tax and legal advisers.