Two renewals can affect both refinance proceeds and funded leasing reserves. Model the four joint outcomes before deciding how much equity to commit and which renewal must be resolved before maturity.
Hypothetical office refinancing decision. An office loan with an $8 million payoff matures in six months. Tenant A and Tenant B both have leases expiring shortly after maturity. Current accepted cash flow is $1.2 million annually. The owner can commit at most $1.5 million of additional cash to the refinance and leasing program.
The lender asks for renewal evidence and a funded leasing plan. The owner needs to determine whether one successful renewal is enough, whether both are required, and how much of the proposed refinance cash is consumed by capital obligations. No renewal probability is supplied, and none should be invented to turn the scenarios into an expected loan amount.
Define the four outcomes before sizing debt
Tenant A contributes $300,000 of net annual income after its incremental operating costs; Tenant B contributes $250,000. Assume those contributions disappear if the respective tenant leaves. Other cash flow stays unchanged, and there is no replacement rent in the immediate refinance sizing period.
For a renewal, assume A requires $300,000 of owner-funded improvements and commissions, and B requires $400,000. Replacement leasing is more expensive: $600,000 for A’s space and $800,000 for B’s. These amounts are invented funded capital requirements, not market allowances per square foot. They are separate from annual cash flow.
| Outcome accepted for underwriting | Annual cash flow | A capital | B capital | Total funded leasing reserve |
|---|---|---|---|---|
| Both renew | $1,200,000 | $300,000 | $400,000 | $700,000 |
| A leaves; B renews | $900,000 | $600,000 | $400,000 | $1,000,000 |
| A renews; B leaves | $950,000 | $300,000 | $800,000 | $1,100,000 |
| Both leave | $650,000 | $600,000 | $800,000 | $1,400,000 |
The OCC income-analysis discussion provides context for assessing leases, renewal trends and stressed cash flow. The modeled lender is assumed to require the listed capital fully funded at closing. Actual lenders can recognize leases and reserves differently; a signed renewal may also contain free rent, delivery conditions or termination rights that change this table.
Size the loan and reserve the cash in one reconciliation
Assume minimum DSCR of 1.30×, a 9% annual principal-and-interest constant and a $9 million collateral-based loan ceiling. New-loan costs equal 2% of principal. The entire new loan is funded at closing, with the leasing reserve carved from that funding and any required owner contribution.
Gross loan capacity is the lesser of $9 million and accepted cash flow ÷ 1.30 ÷ 9%. Net cash available after refinancing is gross loan less 2% costs, the $8 million payoff and the required funded leasing reserve.
| Outcome | Gross loan | Costs at 2% | Reserve | Net cash after payoff and reserve |
|---|---|---|---|---|
| Both renew | $9,000,000 | $180,000 | $700,000 | $120,000 surplus |
| Only B renews | $7,692,308 | $153,846 | $1,000,000 | $1,461,538 contribution |
| Only A renews | $8,119,658 | $162,393 | $1,100,000 | $1,142,735 contribution |
| Neither renews | $5,555,556 | $111,111 | $1,400,000 | $3,955,556 contribution |
Rounding is for display. The model uses unrounded capacities. The positive $120,000 in the first row is before any excluded accrued interest, payoff charge, tax adjustment or other reserve; it is not a promised distribution.
Identify which renewal matters to the funding limit
Either single-renewal outcome fits the stipulated $1.5 million owner commitment, but with very different headroom. If only B renews, approximately $38,462 remains. If only A renews, approximately $357,265 remains. The extra $100,000 of reserve in the second scenario is more than offset by its stronger cash flow and resulting debt capacity.
Losing both creates a $2,455,556 gap beyond committed owner cash. The buyer cannot treat two unresolved renewals as independent minor exceptions just because either individual loss is fundable. The joint outcome fails the available-capital test.
A lender might require a different stress, decline to underwrite uncertain renewals or cap the loan further. The table does not establish approval. It tells the owner which economic conditions must be supported before its proposed funding plan is complete.
Avoid paying twice for the same leasing program
The $700,000–$1.4 million reserve is deposited at closing and later spent on the listed work. Do not deduct those same expenditures again from unrestricted cash unless they exceed the funded account or are ineligible for release. Conversely, a restricted reserve is not available to pay the mortgage payoff gap merely because it appears in the property’s bank balance.
Timing still matters. If the owner must pay contractors before a lender releases the reserve, temporary liquidity is additional to the terminal contribution shown above. Obtain actual release conditions and a dated construction/commission schedule. The case assumes the funded accounts can meet their intended payments on time.
Turn the six months into evidence deadlines
At the start, assign separate dates for agreed business terms, executed renewals, lender acceptance, scope approval and refinance closing. A renewal marked “agreed” by the leasing team may remain conditional for underwriting. Confirm any obligations triggered by tenant notices and the purchase or loan documents with counsel.
The OCC refinance-risk guidance is a useful reason to test the actual repayment date rather than a later stabilized future. It does not require the lender to extend while negotiations continue. If neither renewal is supportable early enough, the owner must pursue a documented alternative with enough time and funding to work.
The committee’s conditional decision is clear: the current capital commitment can support one adverse renewal outcome under these assumptions, but cannot support both. Before relying on the refinance, obtain at least one acceptable renewal and confirm which remaining stress the lender will use, or commit the additional capital needed for the joint downside. A favorable average lease term would conceal the decision that these two specific expirations create.
Sources and evidence
- OCC — Commercial Real Estate Lending, version 2.0Income-Generating Capacity and DSCR, printed pp.42–43 · Checked 2026-10-21 · Bank supervisory context. March 2022 publication, with March 20, 2025 reputation-risk edits. All case amounts, thresholds and contractual conditions are invented teaching assumptions.
- OCC Bulletin 2024-29 — Refinance RiskTransaction-Level Risk Management and Risk-Rating Considerations · Checked 2026-10-21 · October 3, 2024 publication; OCC-supervised bank context. No fictional underwriting threshold is prescribed by the bulletin.
Source dates and applicability matter. Report an error or a changed source.