Commercial Construction Loans: 7 Tips for First-Time Borrowers
Your commercial project, no matter how big or small, will likely need to be competitive in the marketplace for commercial construction loans. Assets America(r), a trusted commercial construction lender, is proud of its track record in providing loans for commercial construction to developers. We have helped our borrowers avoid the many problems that can be associated with commercial construction projects. We’ll be sharing some tips to help you get commercial construction loans.
Tip 1: Learn how commercial construction loans differ from a home mortgage
There are many ways that commercial construction loans differ from consumer-loan mortgages:
- Loans: If you mortgage your house, your lender will give you a lump-sum loan to pay the seller. To match the progress of the construction project, commercial construction lenders will disburse commercial loans in stages. The lender will create a “draw plan” with the borrower, which includes milestones and amounts. Clearing and preparing the land and pouring the foundation are some examples of the first milestones. Before a borrower can access funds, each milestone may require approval from an inspector.
- Only Interest: A mortgage, also known as an amortizing loan, is a mortgage. You pay a fixed monthly amount, which is a mix of principal and interest. The early payments will be almost all interest. However, the balance of the loan term will change and you will pay less. Additionally, commercial construction loans are typically interest-only. This reduces the borrower’s monthly debt servicing obligations. The developer can refinance commercial construction loans after completion with a bridge loan or mini-perm loan.
- Fees. Commercial loans for construction are subject to fees such as processing fees, guarantees and project review. There are fewer fees for mortgages.
- Down payment: Commercial construction loans typically require a 10% to 40% down payment, but some guaranteed loans may require less. Compare this to an FHA residential mortgage which requires only 3.5% down.
- Mezzanine loans: To reduce the amount of cash that is committed to commercial construction projects, a developer may seek secondary financing through a mezzanine loan. Different from second mortgages which homeowners may use to extract equity, mezzanine loans are different.
Tip 2: Avoid Premature Application
We understand that developers want to arrange their commercial construction loans as quickly as possible. You shouldn’t apply to commercial construction loans until your project is “shovel-ready.” This refers to a fully-developed plan.
- A schedule that shows high-level sources of funds and their uses, as well as major cost items.
- The developer’s equity contribution, which includes hard and soft costs that have been incurred into the project.
- Documentation to prove that you own the land, and how much it cost.
- Disclosure of any debts on land or other assets.
- This is a description of the general contractor/builder and its qualifications.
- Confirmation of all zoning and building permits.
- If applicable, an environmental statement
- A market analysis and feasibility study that is up-to-date.
- A Member of the Appraisal Society or another qualified appraiser will perform a formal project appraisal.
- Pro-forma revenue and profit projections for five years after construction.
- Statement of long-term goals or exit strategy
Assets America(r), a commercial lender, is an expert in packaging loan applications. They can help you avoid embarrassment by avoiding premature application.
Tip 3 – Make your project “Finance-Ready”.
You must do all the planning necessary to make your project shovel-ready. However, it is equally important that you make your project finance-ready. This means that
The equity investment is large enough to finance the project. This is usually between 20% and 40%.
Participants and you have sufficient personal net worth or cash liquidity for your commercial construction loans. This applies regardless of whether the loan is non-recourse or recourse. Sponsors must have a net worth equal to or greater than the amount financed. It all depends on the way that the commercial construction lender operates.
- You should have sufficient collateral to cover any pledges made elsewhere.
- Your proforma financials may not be too optimistic or self-serving, but they can be misleading.
- It is important to ensure that your market analysis has been done by an experienced third party.
- Your business plan should contain enough detail, reasonable assumptions, and be supported by evidence.
It is possible to show how you will pay back commercial construction loans. You must show that your cash flow will be sufficient to cover the loan repayments for renovation projects on properties with net operating income.
Tip 4: Avoid short timelines
Don’t underestimate your timelines, we emphasize. You should, for example, allow enough time to find and arrange financing. Remember that the commercial lender for commercial construction loans will have to do its due diligence before they will approve. A short timeline can lead to delays that could upset sponsors and cause the project to be canceled. You can arrange a bridge loan to meet your immediate needs if necessary. A bridge loan could help you buy a multi-family home that is in dire need of renovation quickly before other buyers.
Tip 5: Engage experienced sponsors
You may not have any experience in commercial property construction or renovation if you’re a first-time borrower. This might make it difficult for commercial construction lenders to approve you. They prefer experienced borrowers with a track record of success. This problem can be solved by inviting a partner or co-sponsor with the necessary experience to reassure commercial construction loan providers.
Tip 6: Keep Your Expectations Realistic
The most important thing is that project sponsors must be flexible in their approach to commercial construction loans. Here are some tips on what to avoid:
Do not underestimate the total cost of financing.
Don’t forget to consider the risks loan underwriters will take into account, such as the location and type of the project.
Do not adopt a rigid, “my way or nothing” attitude towards commercial construction lenders. This is a sure way of destroying a deal. You and your commercial lender need to be on the same team.
Don’t assume that you will get a low interest rate. The riskiness of the project as well as the amount of the loan will all impact the cost of capital. The rate of return required by equity investors is also part of your capital cost. To avoid problems down the road, calculate your weighted average cost of capital using realistic assumptions.
Tip 7: Make use of a loan broker
A bank can be used to provide a loan for commercial construction, but it is best not to rush. It can take up six months for bank loans to be completed. You can’t guarantee that the bank will approve your application. A loan broker, on the other hand can move much quicker. A loan broker can move much faster because they use multiple funding sources. This increases your chances of getting the best possible offer.
Assets America” is an online loan broker. They offer a variety of CRE, C&I loans including commercial construction loans. To get you the best deal, we use a large network of private lenders and banks. We specialize in helping you package loan applications to ensure your success. We work closely with you to obtain the terms that you need to make your project a success. Contact us today to get a quote on commercial construction loans. You’ll be glad you did.