Financing a Commercial Construction Loan
A commercial construction loan requires abundant research, developed plan details and project submittal to several different types of committees. This includes planning and zoning, health districts, wetland commissions, etc., for approval.
There are several steps to obtain financing on a commercial property loan.
1. Local Banks or Hard Money Lenders – Most borrowers approach a local bank or lender. A significant challenge for construction developers is that new construction loans carry a high risk for banks. Therefore, many developers are turned down for traditional loans, which leaves them applying for development loans with hard money lenders. They charge higher rates, but construction loans are short-term loans. They are designed to fund the costs for constructing a building, funding the interest of the loan during the construction phase and the lease-up portion of the project. Permanent financing is then obtained through a traditional to pay off of the short-term financing loan.
2. Review and Underwriting – Hard money lenders are easier to work with during the construction loan phase of the project. Borrowers should have a general outline of the project, approximate project costs, summary project projections and underlying assumptions and the general background of the project development. Traditional lenders are more stringent with their terms and conditions, with the possibility of spending months focusing on personal financials, corporate documents and financial statements. Fortunately, hard money lenders forgo these costly time consuming details and allow borrowers to simply do what they do best – construct commercial properties.
3. Time Frames – Borrowers need to understand the timing for lenders or hard money lenders for their approvals. To help expedite this process, it is best to ask each lender what type of requirements they have regarding loan/credit analysis, supervisory approval, loan committee approvals, commitment letters and loan closing.
4. Attorney Involvement – Construction loans can be complicated transactions and sometimes having an attorney represent the borrower’s best interests is necessary. Many banks and hard money lenders are open to attorneys’ modifications of loan contracts, provided they are acceptable and meet the conditions of each company’s needs and standards.
5. Loan Closing – Once the loan agreements are made, the next step is closing. Prior to closing, title searches are complete, in addition to a Uniform Commercial code filing, bankruptcy search, judgment lien, evidence of insurance covering the mortgaged property, bylaws and operating agreements, articles of organization, authorizing resolutions and certificates of legal existence.
In today’s times, it is becoming more difficult for commercial builders and developers to obtain traditional bank lending, which is why more people are turning to hard money lenders for assistance and development loans.