Commercial Construction Loan Options

Commercial Construction Loan Options

According to a November 2012 investigation by the Wall Street Journal, the once-dead commercial loan industry has since sprung to life as a result of still-low interest rates, rising property values and the desire to achieve yield. Here are your options for owner builder construction loans — and what you need to get approved.

Financing Options and Loan-to-Value

The type of financing you need rests largely on the cost of your project, the amount of available collateral, your creditworthiness and your best estimation of the project’s value upon completion. Standard commercial construction loans are available from traditional lenders if you will not exceed 75 percent loan-to-value, have excellent credit, ample existing income and can demonstrate your finished project will make your income statement even stronger.

Bridge Lending

If you need funds to complete an overhaul of an existing property on the premise that the improved building will command higher rents, consider a bridge loan. Bridge loans are short-term loans that provide financing for purchases and renovations. Terms are usually shorter than one year and are costly but feature no payoff penalty. Well-funded companies with good credit are the best candidates for bridge loans, which are refinanced into permanent funding at project completion.

Mezzanine Financing

Should your project require more than 75% loan-to-value financing then a mezzanine loan, once even harder to come by than commercial funding, is an option. Mezzanine financing is secondary financing — the commercial loan industry’s answer to the 80+10 home equity line of credit that many private homeowners used to avoid paying PMI.

Be prepared, however, to provide additional information beyond the appraisal. Lenders expect developers to have skin in the game to ensure that all parties are equally invested in seeing the project succeed.

Takeout Financing

Once the construction is complete you’ll need to secure permanent takeout financing. Takeout financing pays off the existing loan or loans and provides a cheaper mechanism for long-term funding. To qualify, net income from the finished project must exceed the loan’s payments by about 25 percent.