Are you considering expanding, renovating, or constructing a new
building for your business? Or are you an investor looking to build
apartments, offices, or retail space for investment purposes? If so, a
commercial construction loan may be the right banking loan for you.
Traditional construction loans are used to assist in financing the
acquisition of land, site work, cost of construction as well as soft
costs associated with the project. Lenders will typically lend up to 75-
80% of the “upon completion” or “stabilized” value (as determined
by an independent appraisal), however limiting advances to 80-
85% of the actual cost of construction. An additional requirement
for lenders to use in their decision-making process is the appraisal.
The appraisal assists in determining the following:
- Are the pro-forma lease rates in line with the market
lease rates
- Are the pro-forma expenses in line with what similar
properties are experiencing
- Is there demand in that area and what is the anticipated
absorption to lease-up the project to generate cash flow to
service the loan
- Determining the “As Is”, “Upon Completion” and
“Stabilization” value utilizing, multiple approaches
Construction loans are draw loans with monthly payments of
interest only, based on the amount outstanding of the total loan.
Typically, draws are completed on a monthly basis, based on an AIA
G702/703 and an accompanying lien release, which are provided
from the general contractor. Once a draw request is submitted to
the lender for funding, an independent inspection will be completed
to determine if the work that is being billed has been completed as
indicated on the general contractors AIA form. Lenders retain up
to 10% of the amount requested, which is used to assure that the
contractors and subcontractors have finished construction of the
project correctly per the plans and specs.
Construction loans tend to be riskier for lenders so providing the
following documentation will assist with the assessment of the risks
involved:
- Description of the building to include the overall size,
number of buildings and number of units
- Itemized construction budget
- Plans and specifications of the building design
- Itemized Pro-forma of income and expenses (income
producing property)
- Projected rent roll (income producing property)
- Estimated construction/draw schedule with a
projected timeline to complete the project (typical
is 18-24 months)
Lenders will also require:
- Site plan approvals
- Permits
- Independent plans and specs and budget review
- Review of the contracts for the General Contractor,
Architect and Engineer. The contracts will need to be
assigned prior to closing
- Builders Risk insurance policy
Lenders will make a loan decision based upon the anticipated
financial results of the project, strength of the borrower and the
overall risk assessment of the project (feasibility). Additional
considerations will be made based upon the experience of the
owner/developer, history of past projects, and outside resources
from the owner such as liquidity. The strength and experience of
the general contractor, architect and engineer will also be taken into
account.
If there is a lease up period, the lender will receive monthly reporting
on the number of units leased along with the monthly rental rates.
The information will be compared to the original appraisal to ensure
the overall feasibility and confirm there is sufficient cash flow to
cover the lender’s loan payments.
Once the project is completed, the local municipality will issue a
Certificate of Occupancy (C of O) indicating that the project is ready
for tenants to occupy the building. The lender will require the C of
O to convert the construction loan to a permanent mortgage. The
permanent loan requires principal and interest payments monthly.
Typically, these loans have a term of 10 years and an amortization
of up to 25 years.
If this is the type of financing you need for your next project, call our
Commercial Lending Team today at (585) 419-0670 to discuss your
loan options.
This material provided by Jason DeWitt.