Commercial Construction Loan
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A commercial construction loan is available in a number of types of instruments, depending on the needs of the builder. There are providers that will provide a free estimate when the client fills out a form on line, providing a credit score, information about property ownership, estimated building costs and other pertinent information. In most instances, an answer can be obtained in under four minutes, so there will be no lengthy waiting in line or sitting around for a loan officer to become available at a bank. Some of the programs available can be for the person desiring to construct a residence, but doing the work personally. For these people, a one time amount is available which will require all the usual information requested when applying for traditional lending instruments and borrowers can apply for up to $3,000,000!
Credit scores of course, will be examined. Scores only above 540 will be considered and the better the score the more money that can be borrowed. These instruments are usually for new construction only, but offer no penalties for prepaying loan ahead of time and do not require a reserve. Many times these commercial construction loan lenders will offer low fixed rates on a 30 year mortgage, and allow up to 95% to be borrowed against the value of the home. These same terms can be provided to those who do not wish to build the residence personally, but want a contractor to do it. Adjustable rate mortgages are also available and for a shorter period of time, such as 15 years. If the borrower has credit that isn't so great, the lender can work with these individuals also, and the funding is quick.
Some people just love their current home too much to leave it, and may, instead of building a totally new home, decide to add on to their existing home. If this is the case, then the commercial construction loan will be based on what value the home has after the construction has been completed. Should there be several change orders the crop up, then there will be delays in completing the project on time. Some lenders look at this unfavorably, but can work with the client to provide another type of lending instrument that will get the job done. Be sure to speak with the contractor at all stages of the project to ensure both of you understand what is to be done, what materials will be involved and how much all of this will cost in order to avoid surprise change orders.
When the desire is only to purchase land, there is a commercial construction loan available for this purpose too. However, the lenders will require a very high credit score, so many individuals may not qualify. Not only this, but also these instruments are very short term, at most five years in length. When purchasing vacant land next to property where construction will be done, then this can be added to or rolled into the mortgage for the construction, making an all-in-one package. "For the ways of man are before the eyes of the Lord, and he pondereth all his goings." (Proverbs 5:21)
The type of building being done can be almost anything: for apartments, condominiums, retail space, industrial purposes, multi-purpose, etc. Perhaps a small business owner wants to build a small building for office space. This can be accomplished through a small business or commercial construction loan. In order to obtain this type of lending instrument, the lender will perform some calculations first to be sure that if the borrower defaults or cannot complete the project, then the property can be sold to get back the money. The calculation is referred to as a profit test, which discovers the developers potential profits as a total percentage of the project cost. Should the profit turn out to be less than 20%, the deal probably will not be made.
Lenders also have other calculations to perform, depending on the type of project under consideration. One of these is called a LTV ratio. The commercial construction loan amount is divided by the fair market value of the completed project, and then multiplied by 100 percent. In order to get the fair market value, the completed project will need to be appraised. Most lenders providing money of multi-use and apartment dwellings will not agree to a ratio above 80%.
Should further funds be needed, then another type of commercial construction loan is available which is called a Mezzanine loan. This type of instrument has the company stock as collateral in case of default, instead of property. Foreclosure happens very quickly, in just a few weeks in most cases. These types of loans can be quite large, and it is rare to find a banker or lender that will agree to lend for amounts fewer than 2 million dollars. Also, the project should be quite large to be acceptable.
A commercial construction loan, many times, will not be amortized over 10 years. After the construction is completed, the borrower will need a permanent loan to pay off the construction loan. An instrument of this type is referred to as a takeout loan. These are generally extremely easy to come by. Just be sure to shop around to ensure the best terms are presented for each individual situation. No matter what the building need is, the borrower will most likely be able to find the type of lending instrument to suit almost any type of commercial construction venture.
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