Commercial Construction Loans

New construction and remodel/renovation loans are considered the “bread and butter” for many lenders. These loans tend to have a couple more fees for the lender to earn and can be refinanced quickly with long-term debt. Although lenders like these loans, they also are aware of the risks that come with them. Here is what to expect.

A lender will review your hard costs and soft cost budgets. Typically your hard cost budget will include the actual costs of materials and labor for construction, including all subcontractor fees. The soft cost budget will include financing closings costs, interest reserves (about 5% of the total project), contingencies (generally 10% of the total project), appraisals and other fees associated with the project.

LTV vs. LTC: Loan to Value (LTV) is the value of the project. Usually in a commercial appraisal a lender will give you an “as is” LTV, at completion LTV, and a LTV at stabilization for income producing properties. The Loan to Cost (LTC) will be derived from your budgets previously discussed. Lenders will typically loan 80% of whichever is less of the LTV and LTC. The remaining 20% will need to be your up front equity in the loan. This can be cash or equity in land. Sweat equity, or money earned from fees you don’t pay during the course of construction is generally unacceptable as equity.

Some lenders will provide construction loans only and expect you to refinance the long-term debt with another lender. Other lenders will structure a construction loan as a mini-perm. This type of loan normally has a one-time close and can save you origination fees with the lenders. Either option will get the job done but can be used to give you a tactical advantage in the process.

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