Tips to Make the Commercial Construction Loan Application Process Easier
The decision to build or expand commercial space sets in motion a thousand moving pieces, not least of which is obtaining financing for the project.
For most business owners, a commercial construction loan is essential for getting the project off the ground. These short-term loans typically fund the construction and lease-up phases of the project and could include:
- Land development loans, which are used to fund construction-ready improvements to undeveloped sites
- Acquisition and development loans, which can be used to make improvements to infrastructure or buildings on construction-ready sites
- Construction loans, which fund the labor and materials to construct the project
For owners who are not well versed in real estate financing, the process of obtaining a commercial construction loan can be fraught with surprises and risks. After all, putting debt on real estate is a much different prospect from carrying operational debt.
Here are seven ways that owners can prepare themselves to come out ahead when applying for construction financing:
- Know what you need. Before you get started, understand the type of terms you are looking for. Is it a loan to get through the construction period, or do you need a longer-term loan that will amortize over a 15- or 20-year period? Are you seeking a secured or unsecured loan? Do you have a handle on the total cost of the project, including hard costs (bricks and mortar), soft costs (legal, title and third party reports) and the contingency reserve to cover any unforeseen costs? Defining your needs up front will position you to ask better questions and make more informed decisions as you meet with lenders.
- Decide on sponsorship. It is not unusual for a lender to require a personal guarantee on a commercial construction project. When more than one business owner is involved in the project, determine who will guarantee what and for how long before meeting with lenders.
- Know your deadlines. Commercial construction loans often require that a myriad of deadlines be met above and beyond the payment plan. For example, the Loan Agreement might set specific dates for construction start and substantial completion. The Loan Agreement will also include reporting requirements. Missing a deadline could subject you to penalties or fines. Before you sign on the proverbial line, it is critical to define these deadlines, confirm that they fall within industry standards, and ensure that you can meet them.
- Understand the rate structure. Unlike a retail or personal loan, which typically has a fixed rate for a certain amount of time, commercial construction loans generally use floating rate debt. This means the all-in rate changes periodically depending upon the base rate chosen.
- Meet with multiple lenders. Unless you have a long-established relationship with a bank, visit at least two or three lenders to explore financing options. In some markets, lenders are becoming more selective of what they will fund. The good news? Owners have more choices than ever to explore, including community, regional and national banks; credit unions; specialty finance companies; debt funds; the Small Business Association; and life insurance companies.
- Be ready for the long haul. Although processing time varies, applying for and closing a commercial construction loan takes an average of 90 days and requires substantial paperwork. Lenders will dig deep into the financial information about your business, requesting everything from company operating statements to earnings projections, customer references, and even personal financial records. They will also want to review details about the project, including construction estimates, architectural plans, and specifications.
- Retain legal representation. Real estate is a complex business. The smartest thing you can do is retain legal counsel with experience in commercial real estate law to ensure your interests are protected.
An additional strategy that owners can employ: partnering with a knowledgeable and experienced developer or construction firm. Although they will not offer the same level of expertise as a real estate attorney, they can help guide owners through different steps. They will also anticipate when needed documentation is due to the lender and in what format, which should help speed up the proceedings.
Make no mistake: Applying for a construction loan can be grueling. But with up-front preparation and knowledgeable representation, you can keep all of the moving pieces in order as you work through the process.
Is a construction project in your future? Contact Angie Gill, Miller-Valentine’s Vice President of Real Estate Finance for guidance.