Terms & Rates for Construction Loans
The most common commercial construction loans provide temporary, short term financing throughout the development and leasing up period. Many lenders are hesitant to provide long term, low rate notes on what they see as a risky building process where things can go wrong, timelines can be missed, and costs can exceed projections. They are much more comfortable providing this permanent financing once the development process is completed, the building is in use, tenants are secured, and they can see the actual financials on the operational commercial property. Construction loans fill this gap. They have shorter terms that are designed to cover just the development and leasing (or sale) period. As they are assuming higher risk in this period, construction loans typically have slightly higher rates than permanent financing. But they play a critical role — providing investors and developers with the financing needed to move a project from ground breaking through construction and to profit.
Construction Loans Colorado Underwriting
The underwriting for Colorado construction loans, and nationwide loans, focuses on the real estate proforma and the economics of the individual project. Unlike permanent or investment real estate loans, most construction projects don’t have a property history. As a result, the underwriting process omits these numbers in the evaluation.
During placement, underwriting, and approval process we specifically focus on a detailed break down of the construction budget, the local real estate market, the building and investment team’s experience, proforma, the investor’s financial situation, and any risks associated with the project. Documentation is likely to include tax returns, proforma, project plans, cost estimates, financial statements, and other construction financing and usage. (For more information on how construction loans work, check out Investopedia’s article.)
Construction Loan Funding Timeline
Construction loans in Colorado and throughout the US include an initial disbursement at the time of closing, designed to cover both prior and upcoming expenses for the project. The remaining portion of the funds is managed by your loan administrator, and is disbursed periodically throughout the project. Typically you will have monthly distributions based on draw requests, all of which are accompanied by documentation for recent construction expenses.