A construction loan is short-term financing that can finance a new construction project. A commercial construction loan is a type of financing you might consider if you are planning on building a multi-family house, apartment building, high-rise, commercial office building, or other large projects.
Commercial construction loans are not like other loans. Most loans are structured, so the borrower gets the requested amount upfront. Once the loan is approved, the borrower pays over some time.
Construction loans in total upfront. Instead, you will work with the lender on a draw schedule. As your project reaches new milestones, you will be by the lender. The first draw was to clear and develop the land. The foundation has the framing, and the next draw may follow.
A lender will usually require a confirmation from an inspector that your project meets each milestone before they release the next draw. The process will continue until you receive the entire amount and all milestones.
You will only have interest on the construction loan proceeds you receive if the loan amount totals $600,000. But you have only received $150,000 from the lender; interest will be on that $150,000.
What should you do after the project and the entire amount has. You can consider a commercial mortgage instead of paying one lump sum. You can use the lump sum you receive from the mortgage to repay the commercial construction loan.
Commercial Construction Loan Process
1. Get in touch with a lender. Contact a hard cash lender to discuss your project, and learn about the financing options and guidelines they offer.
2. Underwriting of commercial construction loans
The lender will review your application quickly after you submit it. The lender will review the application to determine whether or not it is worth the effort. Includes a review of the project’s cost and summary projections. Suppose the project is one the lender would like to move forward with. In that case, they will sometimes provide you with a loan terms sheet. Typically, the term sheet outlines the terms of the loan. It will be accepted if all information is correct and reasonable. After the term sheet is accepted and reviewed, the lender will proceed to complete underwriting and approve the loan proposal.
The lender will compile more information about the project during the underwriting process. a lender will request construction plans, bids from general contractors, cost projections, and for the project. A lender will often request the borrower’s tax returns, financial statements, and other documents to support their loan request.
A construction loan does not have an operating history. Is this one of the most important differences between a commercial and investment construction loan? The real estate pro forma to determine the property’s value. The credit approval process is similar to commercial loans. However, due to the additional risks involved, the market conditions, development team, general contractor, and general contractor are all thoroughly reviewed.
The lender will send a commitment letter after the loan is approved. The commitment letter is similar to the term sheets but legally binding.
3. Loan agreement and closing
After you have committed, you will have a closing checklist that outlines what you need to do before the loan closes and funding can begin. Additional funds are allocated based on the expenses incurred at each stage.
A typical construction loan rate and requirement
While interest rates and fees can vary widely, they tend to increase in direct correlation with leverage or risk. The cost of borrowing will increase if the lender has greater leverage or is at higher risk. The cost of capital is also affected by factors such as creditworthiness, liquidity, experience, and other factors.
- Conventional lenders:
- Interest rates from 3 to 6%
- Fund 50 – 75% of project cost (Loan to Cost” or “LTC”)
- 60-90 days to fund, usually
- Prepayment penalties and underwriting covenants are subject to strict financial, credit, and experience requirements.
- Additional deposit requirements, concentration limits, or restrictions for specific borrowers are often required.
- It can be difficult, or even impossible, to modify or change construction loan terms halfway through with a traditional lender.
- Private and hard money lenders
- Interest rates from 7 to 14%
- 75-90%+ LTC requires less cash at closing (“down payment”) than conventional lenders to fund.
- Commercial Lending USA will fund 80-90% of project costs and can also use the land to provide equity.
- Liquidity, net worth, experience, and credit requirements are much more flexible.
- Funding typically takes between 15 and 60 days.
- Commercial Lending USA can close most projects in 1-2 weeks from the appraisal date (larger loans may take more time).
- There are no deposit requirements, and covenants will not be required.
- Commercial Lending USA does not typically underwrite prepayment penalties or covenants, and there are no deposit requirements.
Conventional lenders have lower interest rates, but they have lower leverage. You will need more equity and cash, take more extended approvals, and close processes, and there may be strings attached. Private and hard money lenders offer higher interest rates but lend more to the project’s cost. This that you will need to provide less cash upfront. Loans are easier to qualify for, quicker to close, and have fewer strings.
Different types of commercial construction loans
Developers and investors have a variety of options for commercial financing solutions. These include land development, vertical building, acquisition, and development projects.
Relevant –Different Types of Conventional Loans?
Commercial construction loan can be challenging to obtain and complex. Understanding how lenders evaluate them can help you understand the financing process. Commercial Lending USA specializes in real estate development loans and commercial construction loans. Call one of our loan specialists today if you have any questions or are looking for financing. +1 (571) 544-6600