In the real estate industry, things change rapidly. Because of this, there are big chances and big problems. This is what you need to do to get good “commercial construction funding.” It can be challenging to obtain the necessary funds to purchase new properties, undertake significant renovations to existing ones, or invest in properties strategically. To succeed, you need a strong business partner who thoroughly understands the market and its nuances.
As a correspondent and table loan source, our company’s primary role is to assist flat owners with their financial difficulties. We have been checking out individuals for more than 30 years and have a vast network of capital sources. We can help you build new apartments, renovate them, restore them, flip them, hold them, or rent them out.
Here are 5 essential things you must do to get the “commercial construction funding” you need for your next project. It talks about crucial parts of real estate development loans, property development loans, and “commercial construction loans.”
Tip 1: Crafting Your Project’s Comprehensive Financial Blueprint for Commercial Construction Funding
For any large construction project to be successful, a detailed project plan is essential. Still, it’s necessary when you want to get a lot of “commercial construction funding.” Lenders want to know everything they can about your project’s ability to generate revenue, its scope, and its potential for success.
Defining Your Loan Request and Project Scope
The first step in creating a financial plan is to be very clear about your loan request and the entire project. This requires a detailed list of all the prices that are expected. Think about all the costs, from buying the land and doing the research that goes along with it to the many permits and fees charged by the government. You need to get a good idea of both the direct and indirect costs of labor as well as the changing prices of products. Importantly, always plan for a reasonable emergency fund to cover unexpected costs and delays.
It’s essential to know more than just the prices; you also need to understand realistic timelines and the various stages, from construction to permanent loans. Lenders determine whether a project is feasible based on the clarity and accuracy of these predictions. They will be closely examining how well you can manage the project, ensuring it is completed on time and within budget. This detailed breakdown demonstrates that you have a good understanding of the project’s details, which increases the likelihood of its success and solidifies the budget for development.
The Significance of Loan-to-Cost (LTC) and Equity
One important factor that lenders consider when deciding whether to grant a commercial construction loan is the Loan-to-Cost (LTC) ratio. An investor is ready to pay a certain amount of LTC toward the whole project. It is essential to understand the life cycle time (LCT) of your project and its impact on user equity. When people want to borrow money, lenders typically require a substantial down payment. This is sometimes referred to as “skin in the game.” The loan is less likely to lose money because you have the cash on hand.
Your credit history and financial records are crucial in determining the strength of your economy and the amount of equity you can offer. A good credit score and a history of responsible economic management can make it easier to secure a business real estate loan. If you put up more wealth, lenders will be more likely to give you a loan. This demonstrates your experience as a developer, which helps you meet your equity goals.
The Critical Role of a Robust Business Plan
You should have a solid business plan if you want to secure funding for the construction of the building. With its goal, market chance, and estimated profits, it tells the story of your project. It’s essential that this paper clearly outlines the expected cash flows and how the property will generate revenue once it’s completed. It’s necessary to conduct a comprehensive market study on the business properties you’re working on, whether they’re multifamily apartment buildings, single-family homes, or multi-unit buildings with 5-10 units. This study should demonstrate to the target audience the need for your project.
Additionally, your business plan should clearly outline how you plan to exit the apartment investment property. It doesn’t matter what the plan is a long-term hold for rental income, a sale when the market is safe, or a refinance lenders need to know how they will recoup their investment. For the success of your project, it is essential to have a well-researched and properly presented business plan with strong pro forma statements. This will allow lenders to trust you.
Tip 2: Exploring Diverse Commercial Construction Funding Avenues
The term “commercial construction funding” refers to various types of loans, each tailored to a specific project, borrower, and financial situation. It’s essential to be aware of all your options if you want to find the best financing for your commercial real estate project.
Traditional Commercial Construction Loans
Most of the time, a traditional commercial construction loan is used to finance major renovations and the construction of new buildings. In some of these loans, the user only has to pay interest on the money that has already been given to them while the building is being constructed. Sometimes, when a multifamily property is rented out, the building is completed, and the project is safe, the loan transitions into a fixed financing plan. The cash and interest on the loan will then be paid back.
The draw plan is a crucial component of these loans. It’s not all given out at once; it’s distributed over time based on the project’s goals. The backer releases some of the loan money as the building process progresses and specific jobs are completed and verified. The lender is less likely to lose money due to the delayed payment, and the funds will be used wisely for the project’s progress. These steps will help you keep track of your money during the project. For example, you will need to determine the interest rates for the building period.
Specialized Commercial Real Estate Loan Products
In addition to the standard options, several specialized commercial real estate loan products are available to address unique funding needs.
- Bridge loans are short-term loans designed to “bridge” the gap between two significant financial events. They’re helpful when you need cash quickly, like when you want to buy a house before getting a long-term loan or pay for repairs before you can get a fixed loan.
- Hard money loans are quick and open loans typically provided by private lenders. This makes them perfect for situations that are special or require immediate payment but can’t be handled with a regular loan. The interest rates and terms are usually higher on these loans, however, because there is a greater risk.
- Debt Service Coverage Ratio (DSCR): These loans are primarily used for existing properties that generate income, such as multifamily rental properties. Lenders consider how much money the property could generate to cover its expenses. This makes it appealing to buyers who prioritize financial gain over disclosing personal financial information.
- SBA loans: 504 and 7(a). The Small Business Administration (SBA) guarantees loans through programs like 504 and 7(a). But you can use them for more than just making. People and small businesses can also use them for commercial sites they own, as well as for specific construction projects.
- USDA B&I Loans: The Business & Industry (B&I) loan program of the USDA helps approved business and industry projects in rural areas. This enables the local economy to flourish in the regions that are currently underdeveloped.
- FHA Commercial Property Investment Loans and FHA Construction Loans: The Federal Housing Administration (FHA) offers numerous programs to support multifamily properties, including options for purchasing and constructing properties, particularly for projects aimed at making housing more affordable.
- No-Doc Loans and Lite-Doc Loans: These options aren’t often used for starting from scratch, but they are available in certain situations and offer easier application processes with less paperwork required. They usually have higher interest rates to make up for the smaller screening.
- State Income Loans: Some states may offer loan programs that provide funds based on verified state income. The goal of these programs is to help borrowers in specific scenarios.
You can earn significantly more money by exploring alternative ways to make money, including private lenders, and when they become available, learn about non-recourse loans.
Term Loans vs. Construction Loans
It’s essential to understand the distinction between short-term loans for building projects and long-term loans for completed homes. Construction loans are meant to cover the cost of building something, and their terms (like interest-only and draw schedules) are flexible to fit the needs of the project as it grows. Once the building is completed, these loans typically transition to a permanent financing plan, which is a long-term loan for the stabilized property that generates a steady income. To implement this change, acquisition and growth loans are often refinanced to secure better long-term rates and terms.
Tip 3: Optimizing Your Application and Underwriting Process
To get commercial construction funding, it’s not enough to have a great project. You also need to show your chance in a careful and well-organized way. It’s easier to obtain money and your chances of success increase when the application process is simplified.
The Underwriter’s Perspective and What They Look For
We know exactly what lenders want because we have been going through the process for 30 years. Underwriters mostly look at three things when they review a loan application for a commercial construction loan:
- Experience as a Borrower: Lenders want to see that you have developed real estate or worked on similar projects before and done them well. You or your team must have extensive experience in managing building tasks, adhering to budgets, and completing projects on time. The lender sees less danger because of this.
- Strength in the area of finances: This encompasses both the project’s budget and your personal and business finances. Lenders will carefully review your financial papers, credit history, and cash flow to ensure you can handle any potential problems and provide them with the necessary equity.
- Project Viability: Underwriters carefully review your project to ensure it is sound in its most basic aspects. A detailed market study, a careful examination of your business plan, accurate cost figures, and a thorough understanding of the project’s anticipated cash flow and exit strategy are all essential components of this process.
The most important thing is that the paperwork is clear and complete. Any misunderstanding or missing information can lead to delays or even rejection. Lenders conduct extensive studies and risk assessments. How quickly and accurately you can provide them with all the necessary information will demonstrate your skill and readiness.
Preparing a Compelling Loan Request Package
Putting together a well-organized loan request package is the best way to show off your project. There is no need for these detailed papers to be in this package, but they should be there:
- Appraisals: Different ideas about how much the land is worth and how much the property is likely to be worth in the end.
- News about the environment: To identify potential environmental liabilities, Phase I or Phase II environmental studies are conducted.
- In-depth studies, known as feasibility studies, assess whether your idea has a chance of success in the market, both financially and overall.
- Borrower Financials: tax returns, financial records for both the borrower and their business, and statements of cash flow.
- Contractor Bids: Detailed, itemized bids from reputable companies that show how much the work costs.
- Specs, blueprints, and architectural drawings are all parts of specific project plans.
- CVs of essential team members: Drawing attention to real-world experience.
A short executive summary, accurate financial forecasts, and a focus on the unique strengths of your construction project, such as its prime location, firm pre-leasing commitments, or innovative design, are all valuable ways to make your case. This strong loan application package demonstrates your thoroughness and dedication.
Building Strong Relationships with Lenders and Brokers
It’s essential to work with financial advisors and correspondent lenders who have extensive experience, such as ours. We look out for you and utilize our vast network of over 200 real estate buyers and private lenders to find the best funding sources for your project. Because we have worked with lenders for a long time and have extensive knowledge of the industry, we understand their exact requirements and preferences, which enables us to ensure that your application has the maximum impact possible.
Through our exclusive and non-exclusive referral programs, we also build strong relationships with brokers, which helps both new and experienced brokers. These partnerships enable us to reach a wider audience and provide our clients with additional options for accessing cash. A reliable financial advisor can not only help you through the complicated funding process but they can also connect you with capital providers you might not have been able to reach otherwise. This can significantly increase your chances of getting competitive business mortgages.
Tip 4: Managing Risks and Unexpected Challenges
Commercial construction projects always involve risks and the potential for unexpected problems. It’s not enough to think about active risk management; you must take action to secure commercial construction funding and complete a project.
Contingency Planning and Budget Management
One of the most essential aspects of managing risks is ensuring that you have a sufficient contingency fund in your building project budget. This fund serves as a safety net for financial resources, enabling it to handle unexpected costs, rising material prices, labor gaps, or minor adjustments to the plan without necessitating the halt of the entire project or incurring more expensive financing. As a safety net, many people recommend setting aside 10 to 15 percent of the total project cost.
In the real world, dealing with cost overruns and delays requires enforcing strict cost control measures, regularly balancing the budget, and maintaining open communication with workers and suppliers. By keeping a detailed schedule and regularly comparing the project’s real progress to its planned progress, problems can be found early on. Then, problems can be stopped before they escalate, ensuring good project management and adherence to the budget.
Mitigating Interest Rate and Market Volatility
Changes in interest rates and the market can significantly impact the profitability of a commercial construction project. Individuals seeking to borrow money should understand the distinction between fixed interest rates and variable rates. Fixed rates are stable, which means they keep your rates from fluctuating. If the rates change, the first amounts are less. Still, they leave the project open to potential price rises that may occur in the future.
To protect yourself from rising rates, you can use interest rate caps, trades, or get a rate lock on your loan for a certain amount of time. Additionally, it’s essential to understand market cycles and their impact on business properties. Changes in supply and demand, economic indicators, and market trends in the area can all impact rental income and property values. This could have a direct impact on the revenue generated by your project and, ultimately, on how you plan to conclude the project. You need to consider these market changes to make informed economic decisions.
Legal and Regulatory Compliance
Any commercial building project seeking funding must comply with all applicable local, state, and federal regulations. There are significant penalties for not following the rules, including delays, fines, or even the termination of the project. This can make it very challenging to secure and maintain funding for commercial construction.
This means you need to pay close attention to permits and zoning laws to ensure your project complies with the rules governing the building and use of land in your area. Concerns about the environment are also significant, including the production of accurate ecological reports and adherence to environmental laws. Consulting with a lawyer and the local government early on can help you address these issues effectively. This will help you avoid expensive surprises later on and ensure the project proceeds smoothly and correctly.
Tip 5: Securing Long-Term Success Beyond Initial Commercial Construction Funding
Securing initial commercial construction funding is a significant milestone. Still, the real long-term success of real estate development hinges on adequate post-construction financing and a well-defined long-term plan. To achieve the best returns and build a long-term portfolio, you need to consider more than just the original construction loan.
Converting to Permanent Financing
Once the construction project is complete and the property is stable (e.g., fully leased or reaching its target occupancy), the next important step is often to convert the construction loan into permanent financing. Obtaining a long-term commercial mortgage for properties that generate income is typically part of this process. A permanent loan usually offers more favorable terms than a short-term, interest-only construction loan. For example, the permanent loan has a longer amortization time and a lower interest rate.
It is essential to be aware of the various types of permanent business mortgages that can be utilized for multifamily investment properties. There are multiple types of loans available, including conventional bank loans, CMBS (Commercial Mortgage-Backed Securities) loans, agency financing (such as that offered by Fannie Mae and Freddie Mac), and loans from life insurance companies. Each type has its own unique perks and eligibility requirements. A significant part of our job is to help clients understand these refinancing options and choose the permanent debt structure that best aligns with their financial goals for the stabilized property.
Strategies for Fix and Flip, Fix and Hold, Fix and Rent
There are many ways to invest in the multifamily sector, and finance needs to be flexible enough to fit each one.
- Fix and Flip: Short-term, high-leverage loans are used for projects that will be sold quickly and at a profit. This makes it easy to buy, fix up, and sell the property. The goal is to make as much money as possible from quick returns.
- Fix and Hold: With this approach, you purchase a house and renovate it to keep as a rental property for an extended period. When getting financing here, terms that support steady cash flow generation are given the most weight. Often, these terms lead to permanent debts with lower interest rates.
- Fix and Rent is similar to Fix and Hold, but the goal is to generate rental income as soon as the repairs are completed. For this approach, loan products are designed to help stabilize properties and facilitate the quick finding of tenants.
Our company specializes in matching the right loan products with these specific investment strategies. This way, we can ensure that the funding helps you reach your asset management and portfolio growth goals rather than getting in the way.
Continuous Financial Consulting and Growth
We care about our clients more than just one deal. We provide ongoing financial advice to real estate owners and brokers, recognizing that to succeed in the industry, businesses must continually grow and evolve. We’re proud of the fact that we can build long-lasting relationships and clever partnerships that help people achieve financial success by making wise decisions in the multifamily sector. We are here to help you continue growing, whether you want to purchase additional properties, refinance existing ones, or explore new development opportunities.
Conclusion
To navigate the complex process of business construction funding, you need a plan. We’ve discussed five essential tips: know your project’s financial plan, explore various loan options, make your application stand out, manage risks proactively, and plan for long-term success. Our company is a dedicated multifamily lender and economic adviser. We bring over 30 years of underwriting experience and an extensive network to your project. We are committed to offering you personalized real estate loan options and expert advice to help you secure the necessary funds.
Get in touch with us right away to talk about your commercial construction funding needs and find out how we can help you get into and do well in the fast-paced world of multifamily real estate.
FAQs
What is a typical down payment requirement for a commercial construction loan?
While the blog emphasized the importance of borrower equity, a common question is what the exact percentage is. For commercial construction loans, lenders typically require a down payment of 20% to 30% of the total project cost. This percentage can vary based on the lender, the project’s perceived risk, and the borrower’s financial strength and experience.
Can I use the equity in my land as a down payment for a commercial construction loan?
Yes, you already own the land for your commercial construction project. In that case, the equity you have in that property can often be used to satisfy a portion or all of the required down payment. Lenders will typically conduct an appraisal of the land to determine its current market value and the amount of equity you can leverage.
Are there specific construction loan programs for commercial properties in rural areas?
Yes, beyond the broader options, the USDA Business & Industry (B&I) loan program specifically targets eligible commercial construction projects in rural areas. These loans are designed to promote economic development and job creation in underserved communities, often offering favorable terms due to government guarantees.
What are “draws” in a commercial construction loan, and how do they work?
“Draws” refer to the phased disbursement of funds from a commercial construction loan. Instead of receiving the full loan amount upfront, funds are released in stages as the construction project progresses and specific milestones are met (e.g., foundation complete, framing up, roof installed). Lenders typically send an inspector to verify the completion of each stage before releasing the next draw. This process helps manage risk for the lender and ensures funds are used as intended.
What’s the difference between a “one-time close” and a “two-time close” construction loan?
While the blog discussed the transition to permanent financing, it didn’t detail the closing structures. A “one-time close” (or “construction-to-permanent”) loan combines construction and permanent financing into a single loan with one closing. This can simplify the process and save on closing costs. A “two-time close” loan involves two separate loans: a construction loan that covers the building phase, followed by a separate permanent loan that requires a second closing once construction is complete and the property is stabilized. The latter offers more flexibility in shopping for the best permanent financing terms after construction but incurs additional closing costs.
