Are you an investor looking to build a retail store, office building, industrial building, or another type of an income-producing property? If so, you will more than likely need financing to support the costs and fees that come along with establishing a new office.
Commercial construction loans, also known as commercial real estate loans, are a type of financing provided to businesses for construction projects. These loans can be used as capital to build a new commercial building or to improve already existing structures.
Any form of construction project that is being built for the purpose of making money can be considered a commercial construction, but typically this refers to zoning more than anything else. Be it an apartment or an industrial building, they all qualify under commercial construction.
Compared with residential or private construction loans, these are typically much more difficult to acquire. First, these loans are very large and majority of them are long term. The terms are generally much more rigid and the documentation requirements are much more difficult than that of a traditional loan. For this reason, many may turn to hard money loans for needed funds rather than typical bank lending institutions.
What businesses should take note of
A business entity trying to acquire a commercial real estate loan should have excellent credit rating, solid cash flow and strong reserves. Nowadays, it will likely require a significant amount of reserves as well. With the economy in such horrible condition it may be very hard to obtain this type of financing. You must show your business has the financial capability to handle this burden.
These are the primary requirements that banks look for.
Another aspect that banks will look at is the ratio or difference between the amount of the loan and the projected value of the project when it is finished as well as how soon positive cash flow can be expected. This ratio is called loan-to-value (LTV) and many times lenders will require this ratio to be around 60-85%. For example, a loan for $85,000 can be used for a project that is going to cost $100,000. The LTV is .85, or 85%.
The profit potential of the construction project is also an important consideration for banks. Since these loans are mostly long-term, banks will require strong assurance that they have the potential to make a solid profit, particularly if the real estate market takes a downturn. Banks will not allow a business that is unable to show a high profit margin to qualify for this type of assistance. Many times they will want to see a profit margin around 20%.
Also, these loans typically require a much higher down payment than that of a residential mortgage. This comes to be a very important factor when qualifying for the loan because the la large down payment will lessen the risks on the lenders behalf. By doing this you will prove to the lender you are committed to the project and also increase your chances of securing financing.
Commercial construction loans are not the easiest type of financing to acquire, but businesses that have reliability and stability will find they will have a leg up on the process.