Refinance, or sell, when the loan comes due.
Two ways to handle a maturity, and what each one does to your basis and your next move.
The loan comes due before the lease does
Most single-tenant net-lease loans are written as ten-year fixed money on a thirty-year payment schedule. The payment is sized as if you had thirty years, but the balance comes due in ten. That leftover balance is the balloon. And here is the part that matters: the lease usually runs longer than the loan. When the balloon arrives, the tenant is often still years from its own expiration, still paying rent every month. You are not forced to sell. You are asked to decide.
What a refinance does
Refinancing pays off the balloon with a new loan at whatever rates the market offers that year. The building keeps its tenant, you keep collecting rent, and the only thing that changed is the financing on top. If the new loan is larger than the balance you retired, the difference comes back to you in cash. And borrowed money is not a sale, so that cash is not taxed.
- Value at purchase
- $4,000,000
- Value at maturity
- $5,500,000
- Loan balance remaining
- $2,100,000
- New loan at 65% of value
- $3,575,000
- Less payoff of old balance
- $2,100,000
- Cash out, tax-free
- about $1,475,000
Illustration. Appreciation plus a decade of principal paydown is what creates the room to pull cash, not a sale.
Two forces make that work. The building grew, and the loan shrank as you paid it down. Together they open room under a new loan that did not exist ten years earlier. You pull equity out, the tenant keeps paying, and you owe no tax on the proceeds because you borrowed them rather than earned them.
None of that is guaranteed, which is why the decision is real. Rates at maturity may be higher than the loan you are retiring, and a higher rate means a smaller loan supports the same payment, so the cash-out shrinks or disappears. The building may not have appreciated the way the example does. The honest plan reads the loan and the lease together years ahead of the balloon, so the maturity is a date you walked toward, not one that arrives and corners you.
When selling is the better move
Refinancing is not always right. Sometimes the lease is short enough that the overhang weighs on value, and waiting only makes it heavier. Sometimes the market is high and you would rather take the gain. Sometimes the money simply has a better home. Selling is a clean exit, and if you roll it into another exchange, it stays a deferred one. The lender will want the new loan to cover its payment with margin, usually debt-service coverage somewhere between 1.20 and 1.50, so the building has to support the decision either way.
The loan-due date is a decision moment, not a deal-ending one. The lease term is what really matters.
The point
The balloon feels like a deadline. It is closer to a fork. As long as the tenant is paying and the building holds its value, maturity is a choice between pulling tax-free cash and moving on, not a forced sale. Read the loan and the lease together, because the gap between when the loan ends and when the lease ends is where your options live.
- Loan structure and the cash-out figures are illustrations of common net-lease terms, not a specific loan or property.
- Tax-free treatment of loan proceeds reflects that borrowed funds are not a taxable sale. Confirm your facts with your adviser.