What Are Commercial Construction Loans?
A commercial construction loan to finance the costs associated with the construction or renovation of a commercial building. The funds can cover multiple materials and labor for constructing a new commercial building, renovating an existing property, or purchasing and developing a business loan for building construction.
How Do They Work?
The borrower then pays back the loan through scheduled payments over some time. Instead, the borrower works with the lender to create a draw schedule, with partial amounts of the loan as various milestones. A lender typically requires an inspector to ensure that each milestone has released the next loan portion.
With a commercial construction loan, you only pay interest on the amount released at any time. So if you have only received $100,000 out of a $300,000 loan, you will only pay interest on $100,000.
Here are some other aspects of commercial construction loans to know.
The interest rates for commercial construction loans tend to fall between 4% and 12%. Of course, the higher your credit score, the better your interest rate will be. The lender you work with will also play a role in determining your interest rate–banks typically have the lowest interest rates, while money lenders have the highest.
As with any loan, several fees may be with a commercial construction loan, including:
- Guarantee Fees
- Processing Fees
- Documentation Fees
- Project review Fees
- Fund control Fees
Typical down payments range from 10%-30% of the total project cost. Conventional lenders typically look at the loan-to-cost ratio, the total amount of the loan requested divided by the total project cost. For example, if a business asks for a $165,000 loan for a project that costs $200,000, the loan-to-cost ratio would be 82.5%. Most lenders require a loan-to-cost ratio of 80% to 85%.
Types of Commercial Construction Loans
Several commercial construction loans are available based on your project’s needs. These loans include:
- Land development loans purchase and develop commercial property land. They can also cover things like the installation of water, sewer, and power lines on the construction site.
- Acquisition and development (A&D) loans. This loan gives you the funds for purchasing and developing the land and can sometimes be used to cover improvements on the infrastructure of existing buildings.
- Mini-perm loans cover the costs of labor and materials during the construction period. It is also known as an interim loan, usually lasting between 18-36 months, and is paid off in full once a permanent mortgage loan.
- Takeout loans are permanent mortgage loans put in place after short-term loans run out. Projects considered risky might require the borrower to secure a takeout loan before they can approve a mini-perm loan.
How Do Lenders Evaluate Eligibility?
When considering a commercial construction loan application, lenders will look into a few details.
These are high-risk loans so lenders will look for low-risk borrowers with high credit scores. Some lenders require credit scores above 700.
Debt-to-income (DTI) ratio
This ratio shows the relationship between your business’s income and debt on a monthly business. It gives the lender an idea of how likely you are to be able to cover the costs of a loan with the money your business is bringing in.
The DTI formula is Total Monthly Debt Payments / Gross Monthly Income = DTI.
Debt service coverage ratio (DSCR)
The DSCR shows the relationship between your business’s income and debt on an annual basis.
The DSCR formula is:
Net Operating Income / Current Annual Debt Obligations = DSCR
The higher the DSCR, the better. Most lenders require a DSCR of at least 1.25. That means you generate a 25% profit after your annual debt payments.
Types of Commercial Construction Loan Programs
SBA CDC/504 Loan Program
These loans come with low down payments, competitive interest rates, and credit score requirements in the high-600s. With this loan, an SBA-approved Certified Development Company funds 40% of the costs to build new facilities, renovate existing facilities, or purchase/improve the land. Borrowers can typically borrow up to $5 million.
SBA 7(a) Loan Program
Through this loan program, borrowers can receive up to $5 million, and the repayment terms may go up to 25 years. The interest rates are on a prime rate plus a maximum of 2.75%. Qualifying for this type of loan typically requires a credit score in the high 600s and a down payment between 10% and 20%.
A traditional bank loan is always an option. With these loans, rates, repayment, and down payment requirements vary. Generally, a down payment of at least 10% is required, and maximum repayment terms of 25 years are standard. Fixed and variable rates are available.
When a loan-to-cost ratio is lower, and the borrower needs additional options, they can secure a mezzanine loan secured with stock. If the borrower defaults on this loan, the lender can convert to an equity stake in the property. With this type of loan, the borrower has more leverage and can achieve a loan-to-cost ratio of up to 95%.
Construction Financing with Amplify
If you are looking into construction financing, it generally means your business is growing–congratulations! But it’s easy to be anxious or unsure about the process. Talking with a local commercial loan officer can make the process more streamlined and less stressful.
7 NEED TO KNOW ANSWERS TO MOST FAQS ABOUT COMMERCIAL CONSTRUCTION LOANS
Knowing where to begin when you need financing to finance construction on a new project can take time and effort. You have found the right commercial property. But what next? How do you identify the best commercial lenders for your construction loans?
Diversified Financing Incorporated is a commercial lending usa committed to helping clients get the financing they need. We want you to be fully informed about your options when you approach us for construction financing. This blog will address the most frequently asked questions about commercial construction loans.
1. What are Construction Loans?
A construction loan can finance single-family homes, condos, retail stores, and office buildings. This financing and terms are only available from commercial lending usa for commercial construction loans.
Construction loans are usually for a short period. These loans are short-term and provide cash for your project quickly before you can find long-term financing.
2. What are the different types of construction loans?
There are two different types of construction loans: construction-to-permanent and stand-alone.
A construction-to-permanent loan covers the construction and becomes a permanent mortgage after construction is complete.
Construction loans are not available as stand-alone loans. These loans do not convert into permanent mortgages. To secure a permanent mortgage, you will need additional funds.
3. What is Construction Financing?
Construction financing works similarly. You present your project, and commercial lenders will respond with a proposed deal. Diversified Funding Incorporated keeps our construction financing process simple. We aren’t a bank, so that we can be more creative with our construction loans.
We are always happy to discuss your construction project when you contact us.
- First, we discuss your project with you and then present the details to our real estate professionals.
- We then assess your project, our 45 years of experience creating as construction lenders, AND you, the property owner.
- Once we have decided to proceed with your project, we will help you gather all the information necessary to make a final agreement and get the required funds.
4. Why would I take a commercial construction loan?
Short-term commercial construction loans are something that only some traditional banks will deal with. Banks take longer to provide the funds you require. Commercial construction loans can be beneficial when you require a quick cash injection for your real estate venture.
5. What are the typical interest rates for construction loans?
Because interest rates can vary depending on your financial situation, the commercial lender, location, and construction plan, it isn’t easy to estimate typical rates for construction loans. Reach out to local lenders for information about the average interest rate in your area. They will be happy to review your project and provide you with a proposal.
6. What are the fees for a construction loan?
While every construction loan is different, there are some standard fees. These fees include closing costs, loan coverage, early repayment, and administrative fees. Before you apply for a commercial construction loan, make sure to ask about any fees.
7. What are the requirements of a borrower?
Banks do not issue commercial construction loans. Commercial Lending USA may ask for additional information about your project. These are the essential points that a construction lender will consider when considering your project:
- Credit score and personal financial situation
- Available as a down payment
- As a developer and property owner, you have experience
- Detail project plan
- Selection of contractors and other vendors
- Proposal feasibility
Borrowing money will be more straightforward if you plan your project and the details. Your prospective lender will be impressed by a well-planned plan that shows you are prepared and intend to succeed in your actual property venture.
Are you looking for commercial construction loans?
Diversified Funding Incorporated in Boston, MA. We can help you get funding for your next real estate project. We have over 45 years of experience in lending and specialize in secured realty loans throughout New England. DFI can help you get the financing you need for commercial construction loans.
Contact us today to find a commercial lending usa you can trust and access the resources you can.
For general inquiries:
- Email: email@example.com
- Phone: +1 (571) 544-6600