How to Prepare a Financial Package for a Commercial Construction Loan

Winston Rowe and Associates

Preparing a financial package for a commercial construction loan requires careful organization and presentation of your financial information. Lenders typically require detailed documentation to assess the viability of the project and evaluate the borrower’s ability to repay the loan. Here are the key steps to prepare a comprehensive financial package:

1. Project Summary: Begin by creating a concise summary of your commercial construction project, including its scope, location, timeline, and objectives. Provide an overview of the project’s financials, such as the total cost, expected revenue, and projected profits.
2. Business Plan: Develop a comprehensive business plan that outlines your company’s background, experience, and expertise in commercial construction. Include details about your team’s qualifications, past projects, and any unique selling points that set your business apart. The business plan should also highlight your marketing strategy, target market, and competitive analysis.
3. Financial Statements: Prepare detailed financial statements for your business, including income statements, balance sheets, and cash flow statements. These statements should cover at least the last three years and be audited or reviewed by a certified public accountant (CPA). Include notes that explain any significant fluctuations or extraordinary items.
4. Construction Budget: Create a detailed construction budget that outlines all the costs associated with the project. Include line items for land acquisition, permits and fees, design and engineering, materials, labor, equipment, and contingency funds. Use accurate cost estimates from contractors, suppliers, and other industry professionals.
5. Pro Forma Financials: Develop pro forma financial statements to project the future financial performance of the completed project. Include a pro forma income statement, balance sheet, and cash flow statement. These projections should be based on realistic assumptions, including anticipated revenues, expenses, and market conditions.
6. Construction Timeline: Present a comprehensive construction timeline that outlines the various phases of the project, from site preparation to completion. Include estimated start and end dates for each phase, as well as key milestones along the way. This timeline should demonstrate a realistic and well-planned construction schedule.
7. Collateral Documentation: Identify and provide documentation for any collateral that will secure the loan, such as the property or other assets. Include property appraisals, title deeds, surveys, and insurance documentation. These documents help lenders assess the value and marketability of the collateral.
8. Personal Financial Statements: Prepare personal financial statements for each principal owner or guarantor of the loan. Include personal balance sheets, income statements, and tax returns for the past three years. Lenders often consider the personal financial strength of the borrowers when evaluating the loan application.
9. Project Feasibility Analysis: Conduct a thorough feasibility analysis that demonstrates the viability of the commercial construction project. Include market research, demand analysis, and economic forecasts for the target market. Show that there is a market need for the project and that it is financially feasible.
10. Executive Summary: Finally, compile an executive summary that provides an overview of the entire financial package. This summary should highlight the key points of your business plan, financial statements, construction budget, and feasibility analysis. It should be concise, compelling, and easy to understand.

The Ins and Outs of Apartment Building Construction

Apartment Construction Lending No Upfront Fees Winston Rowe and Associates

In nearly every metro area of the country, building developers and contractors are scrambling to keep up with the growing demand for rental apartments. In 2014, nearly 350,000 apartments began construction. A number that increased by nearly 14% from 2013, according to the National Association of Home Builders.

However, even with a large number of projects underway, there are certainly no shortages of challenges that come with apartment construction and there are a number of variables to take factor in when considering the overall cost of commercial apartment construction.

From what type of amenities you will include with the building to the building’s walkability in the surrounding area and construction variables such as labor, weather, trade tariffs, it can be a challenge to construct the building of your dreams while staying within budget.

As apartment sizes are shrinking, tenants are turning to the amenities to help meet all of their needs while living there and driven property owners to great lengths to include must-have amenities for everyone. But when it comes to designing an amenities package and choosing what amenities to include there can often be a lot of “push and pull.” It is a careful space-planning exercise.

According to a 2015 survey from the National Multifamily Housing Council, amenities such as fitness areas, pools, and in-unit laundry machines were of greater interest to Millennials than to baby boomers and nearly 60% of the 120,000 person survey said they are interested in having a lounge area or party room in their apartment building.

For owners and developers, it is important to know which amenities will give the most return on investment. When designing a new apartment construction project, it pays to stay up on the trends of potential tenants.

Some amenities require not only an allocation of space, but significant ongoing maintenance and expenses while others can be installed at little initial or ongoing cost. Some can even save you money over time. The type of amenities you should include will come down to which amenities are valued most by renters, as well as age group and lifestyle.

Location and Walkability

Determining what amenities are right for any one community can be a challenge, but some amenities can be scaled back if the apartment exists within a surrounding community.

For some renters, location is the number one amenity. In a 2015 nationwide survey by the National Association of Realtors, roughly eight out of 10 people said that being in walking distance to community features like shops and parks was very important to them when considering a new place to live. Tenants care about the walkability of their living situation. If tenants live within walking distance of restaurants, bars, and gyms then forgoing some of those features can save on apartment construction cost.

However, apartment construction in a walkable city can be a challenge because there is limited space. Not only that, but land costs are also much higher for walkable, urban locations as opposed to rural areas. As a building developer, you will want to find ways to work with a municipality to provide useable sidewalks, trails, and open spaces to attract new renters and encourage a pedestrian-friendly experience for everyone.

Amenities and walkable communities aren’t the only things developers and contractors struggle with when it comes to apartment construction as there are a variety of other factors that can affect the final price.

Many apartment developers are fighting off price increases for things like labor shortage, weather conditions, and building materials due to international trade tariffs. In fact, according to data from the Bureau of Labor Statistics (BLS), even the threat of trade tariffs can affect the price of steel and lumber. In August of 2018, the producer price index for steel mill products jumped by 19 percent compared to the year before and while lumber and plywood also saw a sharp rise in the spring and early summer.

If you are planning to build an apartment building or are a current property owner looking to make upgrades, click below to contact us today!

Winston Rowe and Associates Construction Lending

HUD 221(d)(4) Checklist

Winston Rowe and Associates Construction Lending

If you’re interested in taking out a HUD 221(d)(4) loan, you’ll want to make sure you have all the required documentation.

Below is the complete HUD 221(d)(4) Checklist which is taken directly from HUD’s Application Requirements Checklist:

1. PRE-APPLICATION

    Exhibits Required for the Pre-application Review

        Narrative Description of Proposed Project.

        Form HUD-92013, “Application for Multifamily Housing Project,” including developer’s summary cost figures.

        Resumés showing experience of owners/sponsor and key principals.

        Resumés of Lender’s underwriter, appraiser, and/or market analyst if not submitted prior to the pre-application.

        If Sponsor is nonprofit, resumé of Housing Consultant, if any, and Form HUD-92531, “Standard Contract for Housing Consultant Services.”

        If Sponsor is nonprofit, Form HUD-3433, “Request for Preliminary Determination as a Nonprofit Sponsor and/or Mortgagor” and supporting documents.

        If Sponsor is non-profit, Developer’s Agreement or another document showing relationships and work responsibilities of all parties associated with the transaction.

        Preliminary sketch plans, consisting of:

            Site plan.

            Typical unit and building layouts.

            Ground floor and typical floor plans.

            Wall section plan.

        Market Study with comparables (See Chapter 7 and Appendix)

        Appraisal Exhibits. Forms HUD-92273 and HUD-92274, dated no more than 120 days prior to the date of submission of the pre-application package. See Chapter 7 and Appendix 7. If the processing calls for tax credit and/or bond financed applications, a HUD-92264T must also be included.

        Photograph(s) of the property and immediate area.

        Evidence of site control.

        Location map or maps.

        If commercial space involved, show estimated percentage of total square feet and estimated total income.

        If pre-application is under Section 220, evidence that property is in eligible area (See Chapter 3, section 3.7)

        Copy of ground lease, if any.

        If state or local grants or loans are anticipated a part of the project, evidence that such funds will be available.

        Phase I Environmental Site Assessment.

        Environmental Report.

2. Additional Exhibits at Pre-Application for Substantial Rehabilitation.

    “As is” sketch plans in addition to preliminary sketch plans listed in 7, above.

    Mortgagor’s architect’s basic work write-up, including summary cost estimates of major trade item groups if a partial (non-gut) rehabilitation.

    LBP and asbestos test reports for projects constructed prior to 1978. (See Chapter 5 and Chapter 9)

    Plans for relocation of existing residents affected by work.

    Financial statements for the property for the past three years.

2. APPLICATION FOR FIRM COMMITMENT

Multifamily-FHA-HUD-Loans-Application

    Exhibits Required for Application for Firm Commitment for Sections 220 and 221(d) Make any changes necessary in the pre-application exhibits and resubmit any exhibit that is changed. In addition:

        Transmittal letter.

        Application for Multifamily Housing Project (Form HUD-92013) with fee of $3 per $1000 of mortgage.

        Narrative Summary and Underwriter’s Recommendation.

        Intergovernmental review. See HUD Processing Office to determine State Single Point of Contact and whether review is required for state where property is located.

        Byrd Amendment (Lobbying Certification and disclosure). See 24 CFR Part 87.

        Form HUD-92013 – Supplement for Sponsor, mortgagor, each principal of the mortgagor and general contractor and disclosure of prior legal action relevant to mortgage financing, outstanding delinquent Federal Debt.

        Completed Form HUD-92264 Multifamily Summary Appraisal Report with technical analysis and standard certifications (see Section 11.2.J.) by all Lender third party analysts, and Form HUD 92264-A Supplement to Project Analysis.

        Form 2530, “Previous Participation Certification” for all parties designated on page 1 of Instructions for this Form (see Section 8.3). Also applies to Lessees.

        Verification of social security or employer identification number.

        Organizational documents creating mortgagor entity, if applicable.

        If Sponsor is nonprofit, Developer’s Agreement (if not submitted at pre-application)

        Form HUD-3434 – Certificate of Relationships and nonprofit motives, and Form HUD3435-Certificate of Contractural Relationship.

        Site control document (sales contract).

        Affirmative Fair Housing Marketing Plan (Form HUD-935.2).

        Equal Employment Opportunity Certification.

        Certification from Mortgagor’s Architect (See Chapters 5.5 (B.8) and 5.6).

        Report prepared by Lender’s architectural analyst (See 5.6(B.2)).

        Resumés of Lender’s architectural reviewer and cost reviewer, if not submitted prior to the application.

        Owner-architect agreement on A1A Form B 181 and Amendment.

        Legal Survey Form HUD-92457, Surveyors Report.

        Engineering and specialty reports, if not covered under environmental report.

        Contract drawings and specifications. (See Appendix 5-L)

        Municipal services and other utilities’ assurance letters.

        Off-site improvements/construction (description). (See Appendix 5I(M))

        Cost estimate package (listed in Section 6.2(B.1).

        Identity of Interest disclosure (see Chapter 6, Sections 6.2 and 6.5F) and the 50-75 percent rule disclosure (see Section 14.15M).

        Resumé of the general contractor and Schedule of jobs (work) in progress (See Chapter 8.4).

        Soils report and foundation analysis.

        HUD multifamily appraisal with all supporting documents:

            Rental Housing Income Analysis and Appraisal, Form HUD-92264

            Estimates of Market Rent by Comparison Form HUD-92273

            Operating Expense Analysis Worksheet Form HUD-92274

        If relevant, tax credit certification.

        If supplemental grants and/or loans are part of project financing, provide commitment letter.

        Certification approving release of banking and credit information.

        Evidence of last arms-length transaction and price.

        Personal Financial and Credit Statement, Form HUD-92417 (see Section 8.3).

        Credit reports current within 30 days of the application date.

        Requests for verification of deposits for each bank reference included on Form 92013 Supp.

        HUD-92264A Supplement to Project Analysis.

        Financing plan (sources and uses statement for tax credit projects).

        Environmental report if updated from report submitted at pre-application.

        Resumé of management agent.

        Form HUD-9839 A,B, or C Management Certification.

        Form HUD-9832 Management Entity.

        Management Plan and Sample Lease.

        Management Agreement, if any.

    Additional Exhibits for Substantial Rehabilitation

        Detailed scope of rehabilitation work resulting from joint inspection by Lender and mortgagor (see Section 5.16).

        Lead-based paint reports and asbestos test reports for projects built before 1978.

        Cost estimate package (see supplemental instructions in Section 6.6.)

How Do Commercial Construction Loans Work

Winston Rowe and Associates Commercial Construction Loans With No Upfront Fees

What are construction loans?

A construction loan is a type of bank-issued short-term financing, created for the specific purpose of financing a new home or other real estate project. A traditional mortgage, also called a permanent loan, will help you buy an existing house. However, if you need to build a new house from the ground up, especially if you also need to purchase the raw land, that’s where a construction loan can help.

How do construction loans work?

The loan can be applied for by anyone who is investing their time and money in construction or related expenses. An individual homeowner, a contractor, or a small business owner can use construction loans to finance their construction project. If you already own the land, the equity that you have in that property can be used as your down payment for your construction loan.

Many borrowers ask how a construction loan turns into a mortgage. After the house is complete and the term of the loan ends (usually only one year), the borrower can refinance the construction loan into a permanent mortgage. Alternatively, the borrower can apply for a new loan (often called and “end loan”) to pay off the construction loan.

Does the borrower make monthly payments on a construction loan? Yes, however interest payments on this loan might only be required while the construction project is still underway. Unlike a lump sum loan, construction loans are similar to a line of credit, so interest is based only on the actual amount you borrow to complete each portion of a project rather than all at once. Some construction loans may require the balance to be paid off entirely by the time the project is complete.

More than just for the actual building, a construction loan can also be used to pay for equipment used in construction, building materials, or for hiring employees.

Here are some uses and things to know about construction loans:

New construction: If you are an individual or small business owner who is looking for funding to build a new home for yourself or a client, then you can apply for a short-term construction loan. This type of loan can be used to pay for the construction of new buildings. Construction loans have high-interest rates owing to the risk involved.

Builders or homeowners who want to build custom homes generally look to a construction loan. After completing the project, you can refinance the loan into a mortgage, or you can repay it by taking a new loan from another financial institution.

Expect a big down payment: Construction loans generally require a large down payment of around 20-25% of the total cost of the project, usually the cost of construction and mortgage.

Thorough application process: When you apply for a construction loan, you’ll be asked to provide the details of your construction project, including like the total amount of funding required, details about the builder, a detailed project timeline, the floor plans or construction drawings, the cost of materials, and the cost of labor.. (We’ll talk about applying for a construction loan in more detail later.)

Look out for paperwork: Until recently, it was hard to find lenders offering construction loans online. If you know you want to apply for a construction loan, you might find it easiest to visit your local bank or regional credit unions and ask for information in person. These institutes will be aware of the local property and construction market, and should be able to help you create a plan for your application.

Types of construction loans

Construction Mortgage Loans: This is a loan you can use to finance the purchase of land, or construction of a home on land you already own. These loans are usually structured so that the lender pays a percentage of the completion costs and you, the builder or developer, pay the rest.

During construction, the lender will release your funds in a series of payments, called “draws.” Typically, the lender will require an inspection between draws to check that the project is proceeding as planned. As the borrower, you are responsible for paying interest on the amount of funds you use.

This is different from a term loan, where you get a lump sum payment at once, and then pay back interest on the whole amount. Once your construction is complete and your interest paid, you’re responsible for repaying the entire loan amount by the due date. Generally, construction loans have short terms because they reflect the amount of time it would take to build the project; a year-long term is common.

Construction-to-Permanent Loans: Also called the CP loan, construction-to-permanent loans are another option for financing the building of a new home. CP loans offer some extra convenience to borrowers by combining two types of loans in a single process.

During construction, if you have a construction-to-permanent loan, you only pay interest on the outstanding balance, at an adjustable rate determined by the lender and pegged to the prime rate. The prime rate is a widely-used benchmark based on the federal funds rate, which is set by the Federal Reserve, meaning that if the Fed raises rates, then the interest rate on your construction-to-permanent loan will rise, too.

When the construction phase is over, the C2P loan converts into a standard 15- or 30 year mortgage where you pay principal and interest.

An advantage of construction-to-permanent loans for small business owners and homeowners is that instead of having to get a loan for the construction phase and then a second for financing the finished project, you can get two loans at once. In this scenario, you only close once and pay one set of closing costs.

Commercial Construction Loans: If you’re thinking bigger and planning to construct a multi-family home or apartment building, high-rise, multi-unit retail center, commercial office building, or other type of larger project, then you should probably be looking for a commercial construction loan.

Lenders for modern commercial construction loans for apartments and similar big projects are extremely risk-avoidant, and will expect a developer to shoulder most of the risk by covering up to 90% of the cost of the project. If you’re involved with this type of commercial project, you’ll need to be prepared with a lot of cash on hand to fund the construction yourself.

Why get a construction loan?

Purchase Equipment and Materials: You can use a construction loan to buy material and equipment that will be used in the construction of the new home.

Expanding a Company’s Facility: If you are a small business owner with a physical location and you need to build a new office or remodel an existing one, then you can use construction loans to finance your construction project.

Hiring and Training Employees: You can use the funds from a construction loan to hire new employees for construction purposes. You can also finance education and training costs for those employees with your construction loan.

Overcoming Damage or Disaster Expenses: If your office or commercial property is damaged by unforeseen circumstances like an earthquake or other disaster, you can use construction loans to make necessary repairs.

How can you get a construction loan?

Is it harder to qualify for a construction loan? Yes, construction loans are harder to get than a typical mortgage. Most lenders consider construction loans risky (because there is no asset to secure the loan), so you’ll face some stiff requirements if you decide to apply. Here’s what many lenders require for a construction loan:

Down payment: To get a construction loan, you’ll need to make a down payment of 20% or more of the cost of the total project. This means that you will need to be prepared to start the project with your own funds or assets before a lender will agree to loan more. If you already own the land, for example, it’s likely that you will be able to use that toward the down payment amount.

Talk to your lender about this. The particular amount of your down payment will depend on the cost of your project, the land, and what you plan to do with the funds. Lenders require high down payments as a way of making sure you’re invested in the project and won’t vanish if things go wrong during construction.

Strong personal credit: Anytime you apply for a construction loan, you’ll need to provide the lender with your personal credit history–even if you are applying as a small business. The lender will almost definitely want to see your personal FICO score and your business credit history, too.

Financial documents: Typically, a prospective lender will analyze your current and past debt and payment history, as well as any other loans or liens you may have on your property. Whether this loan is for your own home, or for a small business construction project, you’ll be asked to provide financial statements, tax returns, and proof of other assets.

Good reputation: Whether you are the builder, or you are working with a builder, know that the lender will scrutinize the builder’s reputation. Any public information is fair game for making this judgement call: vendor and subcontractor reviews, online reviews, and previous work history.

If you are working with a builder, they should not hesitate to provide evidence of their good reputation, along with the detailed project plans and cost estimates you’ll also need. If you need help finding a qualified builder, check out one of the many National Association of Home Builders chapters closest to you. A trusted local builder with a solid history of successfully completed projects will have an easier time getting a vote of approval from a financial institution in the form of a construction loan.

Specific plans: To qualify for a construction loan, you must have specific and detailed building plans, construction contracts, and cost estimates ready.

Appraisal: It’s challenging to appraise something that does not exist yet! Of course, there are experts who do just that every day. Construction lenders work with appraisers to analyze your project when you apply for a loan. They review the specifications of your construction project and compare it with other existing constructions of similar specifications. They then draw conclusions regarding the possible worth of the construction in the future.

It is very important to get a good appraisal to improve your chances of getting a construction loan approved. You can get an independent appraisal if you want, but your lender will most likely insist on conducting their own.

How do you qualify for an FHA construction loan?

If you have less-than-perfect credit, you may qualify for a construction loan backed by the Federal Housing Administration. FHA construction loans have lower qualification minimums than most banks. As of October, 2020, these FHA requirements were: FICO® score at least 580 = 3.5% down payment FICO® score between 500 and 579 = 10% down payment MIP (Mortgage Insurance Premium ) is required Debt-to-Income Ratio < 43% The home must be the borrower’s primary residence Steady income and proof of employment

First steps toward construction financing

Before making decisions about your potential construction loan, we recommend that you consider a wide range of options. Banks, online lenders, brokers, and subcontractors can each help you through the difficult and stressful process of completing your construction project. On the other hand, if you choose the wrong partners, they can add delays and complexity.

Here are a few more recommendations for getting started:

Shop Around for the Right Lender: You can look around for a lender that will offer all the options that you need. Some lenders will not provide construction loans while some lenders will provide loans with limited options that you do not need. Check out your local banks and credit unions to learn what type of construction financing they offer, and which options are available to you.

A broker is a professional and expert in construction loans, and an experienced one can save you a lot of hassle. They will understand your requirements, explain to you the best options that you have given your budget, and then shop around for the right lender. They may be able to get you better rates than you can negotiate yourself. Brokers understand the financial side of the construction loan as well as the construction side and both their limitations.

Confirm the Lender’s Experience: This might sound obvious, but make sure to choose a lender with experience in construction financing. If their past experience isn’t clear, you can ask them about past construction projects they’ve financed. You can also ask for references of other developers they have helped.

Tap your network and your local community: If you’re looking for help with a construction loan, look locally. Your personal network is always a good place to look for trustworthy recommendations. If you have a good relationship with a local banker or financial institution, that is also a great place to start.

Which bank is the best for a construction loan?

Your choice of the best bank depends on a number of factors, including your borrower profile, who offers a construction loan in the state where you live, your credit rating, and how much money you have to put down on a construction loan.

Winston Rowe and Associates Commercial Construction Lending With No Upfront Fees.

Commercial Construction Loans: The Ultimate Guide

No Upfront Fee Commercial Construction Loans

Winston Rowe & Associates

You’ve reached the point in your business when it’s time to expand. Maybe you’re renting your office space and you’ve decided that it’s time to build your own office building.

Perhaps you’ve outgrown your property and you want to add on to your existing space. Your scenario could be completely different: you’re a new business just getting off the ground and you want to build your property from the ground up.

No matter what the circumstances, many businesses face a situation where real estate construction or improvements are the next steps for business expansion. Of course, this expansion comes at a very high cost – a cost that many businesses can’t afford to pay up front. This is when it’s time to consider taking out a commercial construction loan.

As with any other type of financing, it’s important to understand the mechanics behind a commercial construction loan.

Read on to learn more about commercial loans, when you should consider applying, and what to expect throughout the application process.

What Is A Commercial Construction Loan?

A commercial construction loan is a type of loan that is used to finance the costs associated with the construction or renovation of a commercial building. The funds from a construction loan can be used to pay for labor and materials for the construction of a new property, the purchase and development of land for a new commercial property, or the renovations of existing properties.

Why Take Out A Commercial Construction Loan?

Business owners who plan to purchase existing commercial properties can get a loan known as a commercial mortgage. However, if you plan to renovate your existing space or construct a new building from the ground up, you’ll need to apply for a commercial construction loan.

New construction and renovations can be expensive — think hundreds of thousands or even millions of dollars. Most growing businesses don’t have this type of cash on hand, so instead, they turn to a commercial construction loan. With commercial construction loans, lenders provide funds throughout the construction process to pay for labor, materials, and land development so you don’t have to cover the costs yourself.

How do you finance a large construction project?

Commercial construction loans are different from other loans. Most loans are structured so that the borrower receives the full amount of the loan as one lump sum. Once the loan is received, the borrower begins to pay back the loan through scheduled payments over a set period of time. Commercial mortgages, for example, often have a monthly repayment schedule over 10 years or longer.

With commercial construction loans, the full amount of the loan is not received up front. Instead, the borrower will work with the lender to create a draw schedule. This means that partial amounts of the loan will be released as the project hits new milestones. For example, the first draw will be for the clearing and development of land. The next draw may then occur when the foundation is poured. Another draw will be released when the building has been framed, and so on.

As each milestone is completed, a lender will typically require an inspector to confirm that the work is completed before releasing the next draw. This will continue until all milestones have been completed and the full amount of the loan has been distributed.

With a commercial construction loan, you will only pay interest on the portion of the loan proceeds that have been received. If the total cost of your new construction is $500,000 but the lender has released just $100,000, you will pay interest on $100,000.

Typically, a commercial construction loan is structured so that the borrower pays only the interest until the loan has been fully disbursed. Borrowers can then pay off the principle in one lump sum at the end of the construction project.

But once the project is done and the full amount of the loan is due, what does a borrower do next? Instead of having to make one large payment, the borrower now can receive a commercial mortgage. The property will serve as collateral, and the borrower will use the funds from the commercial mortgage to pay back the commercial construction loan. With the new mortgage, the lender will now be locked into more affordable monthly payments over a longer period of time.

Other commercial construction loans like the Small Business Administration CDC/504 loan provides more long-term options so an additional loan following the completion of the project will not be needed.

What is the current rate for commercial construction loans?

For commercial construction loans, borrowers should expect to pay interest rates between 4% and 12%. Borrowers with the best credit scores will receive the lowest interest rates. The type of lender you work with is also a factor. A commercial construction loan from a bank will typically have the lowest interest rate, while hard money lenders charge more interest for their loans.

Fees

There are several fees that may be associated with taking out a commercial construction loan. The fee types and amounts vary by lender. Some fees you may have to pay for this type of loan include:

Guarantee Fees

Processing Fees

Documentation Fees

Project review Fees

Fund control Fees

Down Payment

Because a commercial construction loan is a high-risk loan, a down payment is required. By paying a down payment, the borrower takes some of the risk off of the lender. Typically, down payment requirements are 10% to 30% of the total project cost. Rarely will a lender fund 100% of the costs of a commercial construction project.

Conventional lenders use a calculation known as loan-to-cost for commercial construction loans. The loan-to-cost ratio is calculated by dividing the total amount of the loan requested by the total project cost. Let’s say, for example, a business is requesting a loan of $190,000 for a project with a total cost of $200,000. The loan-to-cost in this example would be 95%.

Though requirements vary by lender, most require a loan-to-cost of 80% to 85%. For the example above, the lender would loan $160,000 at 80% and $170,000 at 85%.

If this occurs, what does the borrower do? While they may be forced to come up with the remaining costs out-of-pocket, there is another option — mezzanine loans — which we’ll discuss a little later.

Borrower Requirements: How Commercial Lenders Evaluate Eligibility

Not all construction projects are eligible for a commercial construction loan. There are several factors that a lender will consider in order to determine eligibility.

One of the first things that a lender will look at is your credit score. Because these are high-risk loans, lenders want to work with low-risk borrowers with high credit scores. Though credit requirements vary by lender, you should have a credit score at least in the high 600s before applying to qualify for loans such as the SBA CDC/504 loan. Other lenders may require a minimum score in the 700s. Business credit scores will also be evaluated.

The lender will also consider your debt-to-income ratio, also known as DTI. This ratio shows the relationship between the income and the debt of your business on a monthly basis. Typically, lenders look for a debt to income ratio of 43% or less, although some lenders may have stricter requirements. The lower your DTI, the higher your chances for approval. To calculate your DTI, use the following formula:

Total Monthly Debt Payments / Gross Monthly Income = DTI

Lenders will also consider your debt service coverage ratio, or DSCR. This shows the relationship between the income and debt of your business on an annual basis. To calculate for yourself, use the following formula:

Net Operating Income / Current Annual Debt Obligations = DSCR

The DSCR is a bit different from DTI because you want this number to be higher. This shows that your business is bringing in enough income to cover new debts. Most lenders look for a DSCR of 1.25 or higher, but again, requirements vary by lender. Learn more about calculating your DSCR.

The lender will also look at your industry experience and your current business financials to determine if you qualify for a loan. You’ll need to submit detailed construction plans for approval before a loan can be issued. In some cases, the plans may need to be altered based on any risks spotted by the lender, so your ability to be flexible in your plans is key.

Types Of Commercial Construction Loans

Now that you know more about the commercial construction loan process, it’s time to explore the different types of loans available.

SBA CDC/504 Loan Program

The Small Business Administration (SBA) CDC/504 loan is one of the most popular commercial construction loans. This is because these loans come with low down payments, competitive interest rates, and credit score requirements in the high 600s.

Borrowing Amount

No maximum, but the SBA will only fund up to $5 million

Term Lengths

10 or 20 years

Interest Rates

Fixed rate based on US Treasury rates

Borrowing Fees

CDC servicing fee, CSA fee, guarantee fee, third party fees (however, most of these fees are rolled into the interest rate or cost of the loan)

Possible prepayment penalty

Personal Guarantee

Guarantee required from anybody who owns at least 20% of the business

Collateral

Collateral required; usually the real estate/equipment financed

Down Payment

10% – 30%

With this loan, an SBA-approved Certified Development Company will fund 40% of the costs to renovate existing facilities, build new facilities, or purchase/improve land. Up to $5 million is available for borrowers.

Another lender will need to provide 50% of the project costs, while the borrower will be responsible for the remaining 10%. In some cases, borrowers may be required to pay 20%. Repayment terms are available up to 20 years, and interest rates are based on the market rates of U.S. Treasury issues.

SBA 7(a) Loan Program

The SBA also has the 7(a) program, which can be used for the purchase or construction of commercial real estate.

Through this program, borrowers can receive up to $5 million with repayment terms up to 25 years. Interest rates are based on the prime rate plus a maximum of 2.75%. To qualify, borrowers should have a credit score in the high 600s and a down payment of 10% to 20%.

Here are the base rates and markups for a 7(a) loan from the SBA:

Loan Amount      Less Than Seven Years    More Than 7 Years

Up to $25,000

Base rate + 4.25%

Base rate + 4.75%

$25,000-$50,000

Base rate + 3.25%

Base rate + 3.75%

$50,000 or More

Base rate + 2.25%

Base rate + 2.75%

Bank Loans

A traditional commercial construction loan from a bank is another option for business owners. Rates, repayment terms, and down payment requirements vary. Generally, a minimum down payment of 10% is required, maximum repayment terms of 25 years are standard, and fixed and variable rates are available.

You can start your lender search by talking to your current financial institution about your financing needs. See our post on the best bank loans for small business if you’re interested in specific recommendations.

Mezzanine Loans

Earlier in this post, we discussed loan-to-cost ratios. When a loan-to-cost ratio is lower and the borrower needs to come up with additional money, a mezzanine loan may be an option. This type of loan is secured with stock. If the borrower defaults, the lender can convert to an equity stake. With a mezzanine loan, the borrower has more leverage and can achieve a loan-to-cost ratio of up to 95%.

Where To Find Commercial Construction Loans

You know about the types of loans available to you, so where do you find a lender? This all depends on the type of loan you’re seeking.

An SBA-approved intermediary lender (which includes banks, credit unions, and private lenders) distributes 7(a) loans. For CDC/504 loans, an SBA-approved non-profit CDC provides this funding, although you’ll also have to find another lender to finance 50% of your project costs.

Banks and credit unions provide many commercial construction loan options, including SBA loans, traditional loans, and mezzanine loans.

Finally, commercial construction loans can be obtained through hard money lenders. These are private money lenders that provide short-term funding options for commercial construction projects. While there are a few benefits to working with these lenders, including minimal upfront costs and faster funding, these loans typically come with higher interest rates and fees than options from other lenders.

What is the best place for a commercial construction loan?

Winston Rowe and Associates can find you a lender for your commercial construction loan, the next step is to begin the application process.

Contact them at processing@winstonrowe.com or call 248-246-2243.

During this process, the lender will evaluate your personal and business financials, your credit score, and other factors that will determine both whether you’re approved and what your interest rates and terms will be.

Because construction loans are considered high-risk, you will need to provide the lender with a detailed business plan. This should include an overview of what your business does, its financials to date, details about your current operations, and future projections.

You will also need to provide your lender with details about the project. This includes a complete plan with specs and designs. An expected project cost, including estimates for contractors, materials, and other expenses, must be provided with your application.

Personal and business financial documents will also need to be submitted during the application process. These include, but are not limited to, personal and business tax returns, profit and loss statements, balance sheets, bank statements, income statements, and debt schedules showing current debt obligations. Documentation requirements will vary by lender.

The lender will pull your credit score during the process. Remember, lenders are looking for scores in the high 600s. With some lenders, negative items such as bankruptcies, foreclosures, and past defaults on loans may automatically disqualify you from receiving a loan. For negative items on your credit report, an explanation to the lender may be required.

Because this is such a high-risk loan product, lenders will typically take at least a minimum of several weeks to go over your information. During this time, more documentation may be required or your lender may have questions, so make sure to make yourself available to expedite the process.

Once the lender underwrites and approves your loan, you’ll move into the closing process. This entails going over the loan agreement, which will include all dates and milestones throughout the process. Once all paperwork has been signed and the closing process is complete, you’ll be ready to begin the expansion of your business.

Final Thoughts

It’s always exciting to reach a point in your business when it’s time to expand, but getting the financing you need can be a challenge. If your future plans include constructing new facilities or upgrading your current building, getting a commercial construction loan doesn’t have to be stressful.

If you understand the types of loans and requirements and do some prep work ahead of time, you’ll be able to approach your lender with confidence and get through the lending process with ease.

Free Business And Real Estate Investing eBooks

Contact Winston Rowe and Associates

Welcome to Winston Rowe and Associates knowledge blog, scroll down to the right for posts about commercial real estate.

This is a list of free books about real estate investing, commercial real estate financing and business strategy.

We’re always on the lookout for great free books so bookmark this blog and check back for monthly updates.

These links are not affiliate marketing links, just publications that we feel may add value to people and businesses.

Commercial Real Estate Finance

The eBook Commercial Real Estate Finance, by Winston Rowe & Associates discusses the fundamentals of the different types of commercial property, the various options that are included with properties and the capabilities that you will have as a commercial property investor.

Real Estate Investing Articles

This is a link to 1226 real estate investing articles written by industry veteran’s.

25 Productivity Tips for Successful Business Owners

Productivity is critical to your success at work. Business owners, managers and executives all want to get the most from their employees. If you’re not performing as efficiently or effectively as others, your long-term job prospects could be in trouble.

Real Estate Investing: How to Find Cash Buyers and Motivated Sellers

“Real Estate Investing: How to Find Cash Buyers and Motivated Sellers” teaches real estate investors and those interested in learning to invest in real estate how to define and target ideal cash buyers and motivated sellers. The book covers absentee owners, rehab investors, Section 8 landlords, and other buyer types. Some of the marketing topics include mailing lists, postcards, both online and offline marketing strategies along with examples. Anyone who wants to wholesale a house or is curious about flipping houses should pick this book to get educated on cash buyers and motivated sellers for their real estate investing.

Real Estate – Breaking Bad How to Flip Decaying Real Estate Properties for Profit

Tired of working 9 to 5? You should think of making money with real estate! Yes, the effort is well worth it! You just have to ditch the misconceptions and embark with all the passion you have in store for this amazing trip of rehabbing old houses and giving them a new look and a new owner.  Your reward? A nice profit!

Real Estate Forms Portfolio

A FREE and ready-for-download eBook consisting of a comprehensive collection of real estate-related forms for real estate investors.

Real Estate Secrets Exposed

This FREE e-Book sheds some light on the often mysterious and sometimes daunting world of real estate.

Use 1031 Real Estate Exchanges to Create Multiple Streams of Income

Discover how to use 1031 tax-free exchanges, tenants in common interests, and zero cash flow properties to create new sources of income. Learn how to offer bundled services and attract new clients. This FREE, ready for download eBook is perfect for anyone involved in real estate, taxes, mortgages, insurance, or law.  Download it now!

Make Money Through Real Estate Renovations

Download this FREE eBook and learn how a successful investor makes thousands of dollars from real estate renovations. Download it now!

Discover the Secrets of How to Fund Your Real Estate Deals with Private Lenders

Download this FREE e-Book, and discover the new secrets of funding real estate deals in the post-bubble real estate market, where traditional lending sources are getting very difficult to obtain. Download it today!

Real Estate Investing Strategy for Rehabs

This eBook is about residential rehabbing and the multiple strategies that can be used to maximize profits in this current economic climate. My goal has always been to share knowledge with folks that are truly interested in rehabbing and view it as not only for monetary gain but also see is as an “art and science” like I do. Happy Rehabbing!!

How to Be A Super Property Investor

A FREE, step-by-step guide that will help you become a super real estate property investor. Learn all the basic and some advanced investing techniques that have generated millions for property investors. Ready for download now!

Financial Terms Dictionary – 100 Most Popular Financial Terms Explained

This practical financial dictionary helps you understand and comprehend more than 100 common financial terms. It was written with an emphasis to quickly grasp the context without using jargon. Every terms is explained in detail with 600 words or more and includes also examples. It is based on common usage as practiced by financial professionals.

The Prince by Niccolò Machiavelli

Niccolò di Bernardo dei Machiavelli was an Italian diplomat, politician, historian, philosopher, writer, playwright and poet of the Renaissance period. He has often been called the father of modern political philosophy and political science.

The Science of Getting Rich by W. D. Wattles

This book is pragmatical, not philosophical; a practical manual, not a treatise upon theories. It is intended for the men and women whose most pressing need is for money; who wish to get rich first, and philosophize afterward. It is for those who have, so far, found neither the time, the means, nor the opportunity to go deeply into the study of metaphysics, but who want results and who are willing to take the conclusions of science as a basis for action, without going into all the processes by which those conclusions were reached.

Sun Tzu Art of War

Written in the fifth century B.C., Suntzu and Wutzu still remain the most celebrated works on war in the literature of China. While the chariot has gone, and weapons have changed, these ancient masters have held their own, since they deal chiefly with the fundamental principles of war, with the influence of politics and human nature on military operations; and they show in a most striking way how unchanging these principles are.

Make Extra Money Flipping Houses While On Vacation by Jason Medley

Reveals his simple and proven systems to automate, delegate and outsource nearly every function of his business except cashing his checks. He shows the exact steps that has allowed him to go on multiple vacations with his family throughout the year while having his system continue to flip houses for him.

Achieving Wealth Through Real Estate: A Definitive Guide To Controlling Your Own Financial Destiny Through a Successful Real Estate Business

Have you ever thought about making money with real estate? In Achieving Wealth Through Real Estate: A Definitive Guide to Controlling Your Own Financial Destiny Through a Successful Real Estate Business, author and entrepreneur Kirill Bensonoff takes you through the process of starting your own real estate business step-by-step, featuring his expert tips and tricks.

Business Loans Uncovered

Knowing if you qualify is one of the most important things to know when applying  for a loan of any type. Blindly applying for a loan and being declined increases the chances of you being declined again and again because you not only lower your credit score each time you apply, multiple inquires also serves a red flag to other lenders and as a result lenders put you in a high risk category and charge higher interest rates in the event of an approval Includes: ​Traditional Lenders, Government Sources, The 7(a) loan guarantee program, SBA Low Doc loan program, SBA Express loan program, Factoring, Venture Capitalists, Angel Investors.

50 Simple Secrets To Be A Happy Real Estate Investor

Discover the secrets used by successful real estate investors to create happiness in their lives and businesses. Naturally create more happiness for yourself by implementing time-tested secrets to happiness used by other real estate professional and investors just like you. Start to experience more productivity, satisfaction, and success immediately.

50 Simple Secrets To Be A Happy Real Estate Investor

Discover the secrets used by successful real estate investors to create happiness in their lives and businesses. Naturally create more happiness for yourself by implementing time-tested secrets to happiness used by other real estate professional and investors just like you. Start to experience more productivity, satisfaction, and success immediately.

Marketing Strategies for Real Estate Photography

One of the biggest problems that real estate photographers have once they have set up their business as a legal entity, obtained all the right equipment and perfected their technique is obtaining new clients.

Clients and customers are the lifeblood of any business, but how do you obtain new clients after starting your business?

By developing and executing a strategic marketing plan tailored to your business.

This short guide has been written to help real estate photographers develop their marketing plan and assist with winning new business.

It includes a series of digital and direct marketing strategies along with useful tips and lessons the author has learned from his own experiences that can save you time and money when growing your business.

A marketing action plan template has been included to help photographers execute the strategies learned in this guide book.

Books by Dr William Edward Deming

William Edwards Deming (October 14, 1900 – December 20, 1993) was an American engineer, statistician, professor, author, lecturer, and management consultant.

Educated initially as an electrical engineer and later specializing in mathematical physics, he helped develop the sampling techniques still used by the U.S. Department of the Census and the Bureau of Labor Statistics.

In his book The New Economics for Industry, Government, and Education Deming championed the work of Walter Shewhart, including statistical process control, operational definitions, and what Deming called the “Shewhart Cycle, which had evolved into Plan-Do-Study-Act (PDSA). That was in response to the growing popularity of PDCA, which Deming viewed as tampering with the meaning of Shewhart’s original work.

Deming is best known for his work in Japan after WWII, particularly his work with the leaders of Japanese industry. That work began in July and August 1950, in Tokyo and at the Hakone Convention Center, when Deming delivered speeches on what he called “Statistical Product Quality Administration”.

Many in Japan credit Deming as one of the inspirations for what has become known as the Japanese post-war economic miracle of 1950 to 1960, when Japan rose from the ashes of war on the road to becoming the second-largest economy in the world through processes partially influenced by the ideas Deming taught