Commercial Construction Loans – 7 Tips for First-Time Borrowers
Your commercial project must be competitive for commercial construction loans, regardless of whether you are building new ground or renovating existing structures. Assets America(r), an established commercial construction lender is proud to have provided commercial construction loans for successful developers. Our borrowers have been guided away from many of the pitfalls that could plague a commercial building project. This article will share important tips that can help you secure commercial construction loans.
Tip 1 – Understand the differences between a Home Mortgage and a Commercial Construction Loan
In many ways, commercial construction loans are different from consumer mortgages.
- Disbursements When you mortgage a home, you get a lump sum loan from a lender to fully pay the seller. Commercial construction lenders provide commercial construction loans in stages that match the progress of the project. The commercial lender will collaborate with the borrower in creating a “draw program,” which details milestones and disbursement amounts. The first milestones could include clearing the land, preparing it for foundation pouring, and so on. Each milestone might need to be approved by an inspector before the borrower is able to draw funds.
- An amortizing loan is one that does not require interest. This means that you pay a fixed amount each monthly, with a variable split between principal interest. In the beginning, you pay all interest. Later in the loan term, it flips. In addition, commercial construction loans typically pay interest only, which lowers the borrower’s monthly obligation to service their debts. After construction is complete, the developer will refinance commercial construction loans with a mini-perm, bridge, or other type of borrowing.
- Fees: Commercial loan processing fees include those for project review, funding control, and guarantees. Mortgages are more affordable.
- Downpayment: Most commercial construction loans require a deposit between 10% and 40 percent, though some guaranteed loans might need less. This contrasts with a FHA residential mortgage, which only requires 3.5% down.
- Mortgages for developers: Developers might look into mezzanine loans to obtain secondary funding to lower the cash commitment to a commercial project. Second mortgages are another way that homeowners can extract equity. Mezzanine loan behave differently than second mortgages.
Tip 2: Avoid Premature Application
Developers are eager to get their commercial construction loans arranged as soon as possible. But, it is important to apply for commercial construction loans only when the project has been “shovel ready”. This means that you have a fully-developed and documented project plan.
- A schedule listing high-level sources and uses for funds, including major cost points.
- The amount of equity that the developer will contribute, including the hard and soft cost already incurred in the project.
- Documentation that proves you own the land and what you paid for it.
- Disclosure of any land-related or other assets owed debts.
- Description of the builder/general contractors and their qualifications.
- Confirmation for all zoning approvals.
- Statement on the environment, if any.
- Market analysis and a current feasibility study.
- Formal project appraisal by a member of the Appraisal Institution or another qualified appraiser.
- Pro-forma profit projections and revenue projections for the five year period following construction.
- Statement of long-term plans or exit strategy
Assets America (r) is a recognized expert in packaging loan application and can help you avoid embarrassment from submitting an early application.
Tip 3: Make your Project Finance-Ready
As you do all the preparation work to make the project ready for shoveling, so must you also prepare it for financing. This involves ensuring that:
You have enough equity to invest in the project. This usually falls between 20%-40%.
Participating sponsors and you both have enough cash liquidity or personal net worth to close your commercial building loans. This holds true regardless of whether the loan was recourse or not. The personal net worth of the sponsors should be equal or exceed 10% of the loan amount. This will depend on how the commercial lender works.
- Be sure to have enough collateral you don’t have pledged elsewhere.
- Your proforma financials don’t look too good or are self-serving to a point where they are misleading.
- Make sure that you have a trusted third party prepare your market analysis.
- Your business plan must be detailed and supported by evidence.
The documentation that you can show how your company will handle commercial construction loans. The means to prove that you can pay your loan repayments on renovations of properties that generate net operating income.
Tip 4 – Beware of short timelines
Do not underestimate your timelines. This is what we stress. As an example, ensure you allow enough time for financing to be found and arranged. The commercial construction lender must complete due diligence before it agrees to lend money. Remember that a project with a tight timeline could cause delays and embarrass sponsors. To cover your immediate needs, you may be able to arrange a quick bridge loan. You might be able to borrow a bridge loan to quickly purchase a multifamily house that requires renovations, before others do.
Tip 5 – Engage Experienced Sponsors
First-time borrowers are likely to have limited experience with commercial property construction and renovation. Some commercial construction lenders might be hesitant to lend to someone who has a proven track record. You can solve this problem by getting a co-sponsor, or partner, who has the experience and knowledge to reassure lenders of commercial construction loans.
Tip 6: Keep Your Expectations Realistic
Most importantly, project sponsors should be open-minded about commercial construction loans. These are some tips to help you avoid making mistakes:
You shouldn’t underestimate your total financing costs.
Do not ignore the risks that loan underwriters will look at, including where the project is located, what type of project it is, and market risks.
You shouldn’t be obstinate and insistent with the commercial construction lender. It’s a sure-fire way to endanger a deal. Keep in mind that you and your commercial lending institution should be on one team.
Do not assume you’ll get a low-interest rate. The cost of capital is affected by several factors, including the riskiness and the size of the loan. Also included in your capital cost is the return rate required by equity investors. So that you don’t have to face any problems down the track, calculate your weighted-average capital cost based on realistic assumptions.
Tip 7 – Use a Loan Broker
Although you can get a loan from a bank to finance commercial construction projects, it’s best to not rush. The process of getting a bank loan can take as long as six months. There is no guarantee that your bank will accept your application. However, a loan broker is able to move faster. You can also expect to receive the best deal possible because a loan broker works with multiple funding sources.
Assets America” loan broker offers a wide range of CRE and C&I loans. This includes commercial construction loans. We have a wide network of banks and private lenders that we can use to find you the best deal. Additionally, we are experts in packaging loan applications to maximize their success. We will work with you in order to achieve the terms necessary to allow the project to succeed. We are happy to provide you with a current quote on commercial construction loan – we’re sure you will be pleased!