Commercial Construction Loans For Newbies

Commercial construction loans have some similarities to conventional real estate loans, with some particular differences along the way. Here is an outline of how the loan process works.

When a developer submits a loan request to a lender, the construction loan process begins. The top lenders for these loans are community or regional banks. National banks and other specialty lenders also make these loans, but local banks understand the local real estate landscape much better.

Real Estate Development Loans

There are two different types of commercial construction loans, one for each phase of development. Short term financing covers the construction and initial leasing phase of the commercial project. Long term permanent financing is used after a commercial property has leased up to an occupancy rate at market level.

Commercial Construction Loan Underwriting

After the loan request is given the green light, expect to receive a term sheet. This non-binding sheet informs you of the terms and conditions of the loan. Once you have negotiated terms on the sheet and have accepted it, the underwriting process can begin.

During underwriting, the lender will review and evaluate the construction budget details as well as the health of the local commercial real estate market. You will need to supply documents in this phase such as tax returns, project plans, cost estimates, and other financial statements that can support your loan request. Expect emphasis to be placed on your choice of general contractor.

The difference between construction loans and a standard real estate loan is that the valuation of the property is based only on the qualification factors that you bring to the table. This means that the underwriter will try to mitigate the extra risks inherent in this type of loan. Upon approval of the construction loan, you will receive a binding letter of commitment. This will provide the official terms of the loan and is a binding contract.

Commercial Construction Loan Closing

Closing on a commercial construction loan is complex, with lots of documentation, regulation, and procedures. Commercial construction loan closings are complex and involve an overwhelming quantity of documentation and procedural nuances with attorneys involved for both the borrowing and lending sides. After the loan closes the bank will start to release the loan funds. Typically, commercial construction loans are partially funded at first to cover costs that were previously paid for. Then funds are released on a monthly basis for expenses of the previous month.

Getting a commercial construction loan is detailed and time consuming. Completing the process can give you the benefit of a large amount of capital to make your project plans a reality.