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.