A Banker’s Take on Refinancing $5MM Luxury Real Estate in California

It happens more often than people think.

A longtime client walks in with a $5 million luxury property – immaculate home, prime coastal location, and the kind of curb appeal that sells itself, and wants to talk about a refinance. They’re looking to pull out equity, maybe consolidate some debt, or restructure for estate planning. On paper, everything looks solid. They’ve got assets, credit, and a clear purpose for the funds.

But as we dig into the details, the numbers start rubbing against the corners of our guidelines. And that’s where the conversation changes.

This isn’t about the client’s worthiness or financial acumen, it’s about the constraints we have to work within. And believe me, there are many.

The Disconnect Between Assets and Lending

In the private banking world, it’s common to work with clients who are “asset-rich, cash-flow-light.” They might hold millions in real estate and investments, but not enough consistent, reportable income to fit into the debt-to-income ratios regulators want us to follow. When that happens, the loan can hit a wall, even if the value and borrower profile are strong.

Let’s say the property is worth $5 million. The client wants a $3.25 million loan, just 65% LTV. From a pure collateral standpoint, that’s safe territory. But if their income doesn’t fit neatly into the formula, or if their liquidity is tied up in non-traditional holdings, our options narrow fast.

If they’re self-employed, it’s another layer of complexity. We might need multiple years of tax returns, CPA letters, profit-and-loss statements – not because we don’t trust them, but because compliance requires it. And if the property is in a niche location, a hillside in Malibu, a modernist retreat in Big Sur, or a smart home in Palm Springs, the underwriters may start flagging “marketability concerns” even when comps look fine.

Why the Bank Might Say No – Even When It Looks Like a Yes

Institutional lending has rules. They exist to protect both the bank and the borrower, but those rules are inflexible.

• Debt-to-income ratios: Even with a strong asset, most banks won’t exceed 45–50% DTI on a refinance for a luxury property.
• Liquidity requirements: Some clients, especially retirees or those who’ve moved heavily into real assets, might not meet the post-close reserve requirements.
• Underwriting scrutiny: Anything out of the ordinary – a property in a trust, ownership by an LLC, or income from a portfolio of businesses, slows the process and adds friction.
  

We often find ourselves saying something that feels counterintuitive: “It’s not that you can’t afford the loan, it’s that we can’t document it the way we’re required to.”

That’s a hard message to deliver, especially to high-net-worth individuals who’ve spent a lifetime building their wealth. But it’s reality.

The Case for Keeping Multiple Funding Options Open

This is where the importance of alternative funding sources comes into play.

Not every lender sees the world the same way. Banks are governed by layers of regulation and policy designed to mitigate systemic risk. That’s their job, and it’s a necessary one. But it also means there are deals – good, sound, responsible deals—that banks just can’t do.

Specialty lenders and private capital providers step into that space. They’re not bound by the same federal underwriting standards, and they’re often more comfortable evaluating a borrower holistically rather than through a narrow lens. They look at total asset value, exit strategies, project feasibility, and market positioning, not just adjusted gross income or W-2 wages.

When a client has those relationships in place, whether through their advisor, family office, or personal network, they’re not stuck if a conventional door closes. They have options. They can move quickly. They’re not forced to restructure their finances just to meet bank criteria.

What Happens When Those Options Don’t Exist?

That’s where things get uncomfortable.

A refinance gets delayed. Deadlines for other transactions get missed. Estate planning gets more complicated. Or worse, a client ends up accepting terms that aren’t in their favor simply because they didn’t have alternatives lined up.

It’s not uncommon for someone to come back to the bank after six or nine months and say, “We had to take what we could get.” That’s a hard position to be in, and often completely avoidable with foresight and the right relationships.

Final Thought: Don’t Wait Until You Need the Money

Here’s the takeaway, and it applies whether you’re refinancing a trophy home, expanding your real estate portfolio, or just optimizing your balance sheet: Your financing relationships are like insurance policies. They work best when they’re set up in advance.

Have conversations before you need the loan. Understand where your profile fits-and where it doesn’t. Build a network of options that spans the traditional and the alternative. That way, when the time comes to act, whether it’s a refinance, acquisition, or cash-out, you’re not scrambling.

You’re ready.

Because when you’re dealing in seven and eight figures, timing isn’t just a convenience – it’s leverage.