Summer is right around the corner, which means we’re entering the height of construction season. Understandably, most construction projects kick off once the ground has thawed and there’s less chance of precipitation. In northern or mountainous regions where ice and snow can force ongoing construction to a standstill, crews have a limited window to finish projects. Summer represents a condensed period of activity when it comes to construction.
Most building projects have a set of consistent resources demanded for the job: planning, labor, materials, vehicles, supplies, permits, and tools. As construction ramps up, so does competition for these valuable resources. When there’s a shortage, can be fierce. Demand puts pressure on the market in another way as well. If there are a limited number of jobs available for bid or suitable land to build on, developers need to be able to move forward faster and better than their competition.
How do they move faster and better? The answer is by commanding capital. Those who command capital can get deals done. Without capital, you can’t get the materials and equipment you need. Closing fast can keep your project moving during a time of high resource demand.
So how do you close fast and keep projects moving? That’s where a commercial loan broker comes in. Most developers wouldn’t even consider doing construction without financing. It’s one of the best ways to ensure your project gets off the ground and is protected from trouble. If your project hits a roadblock, you don’t have to pay off a full loan. If you find out your estimated costs are lower than expected, it’s easy to adjust your loan.
Let’s run down a few of the more salient points when it comes to construction financing:
As you probably already know, there are two main parts of a loan payment; the principal and the interest. With many types of loans, you pay a little of both at a time. A certain percentage of each payment goes to pay down the principal and the rest goes toward the interest. You can begin with payments weighted to the principal and pay more of the interest as the loan ages.
With construction loans, you don’t pay any of the principal until the end of the loan term. That means while your project is ongoing, you only need to pay interest. This deferred principal allows you to manage expenses while you’re working on the property. Construction financing is built on the project timeline, so once construction is complete you will need to have a ready buyer in place, if you are a developer, or a long-term loan, if you plan to retain and operate the property. Once the property starts earning, either through sale or income generation, you can address the principal loan amount.
Construction loans are a little different when it comes to how the lender pays out the funds. In a real estate loan or equipment loan, the lender typically releases the full sum of the loan all at once. That’s so the borrower can buy the property or the equipment. With construction loans, the lender pays a portion of the loan at a time, not the full amount. These payments are released when the project reaches a milestone.
How are milestones structured? When the loan is approved, you and your lender work on developing a series of stages in the project. As you complete one stage or milestone, the lender releases funding for the next milestone, and so on. Should you discover the cost of your materials goes up, or you need to hire more labor, many construction loans come with some funds held back for contingencies. In many cases, the developer must set aside contingency funds prior to signing the loan paperwork.
It speaks to the demand for construction loans when so many lenders offer them. But, as with most loans, the terms and costs vary from lender to lender. Construction loans are available from banks, credit unions, insurance companies, private lenders, and the government to name a few. Government loans might be suited to construction for agriculture (from the USDA) or for companies struggling with getting approved (from the SBA). Banks offer loans, but they can be difficult to qualify for and take a while to be approved. A developer who intends to sell the property will find a different rate than one who plans to move into it.
The point here is that there’s a loan for every type of project and a lender that offers it. The challenge comes when you try and find out which of these options is best for your specific project. Brokers are already familiar with the loans in the market and can save you a lot of time and energy when you’re hunting for financing. Think of them as your “one-stop shop” for construction loans.
Construction doesn’t always mean starting with a foundation and working your way up. First, the land being developed needs to be prepared. There are loans designed for exactly that purpose. Land development loans help developers install utility infrastructure, handle permitting, flatten land, build roads, and remove large obstacles. Some businesses specialize in this scope, selling individual lots or larger plots of land to builders. Others handle multiple stages, constructing residential or commercial buildings for sale, or to manage.
For developers who build and hold property to add to their portfolios, term-to-perm construction loans are available. These loans start as construction financing. Once the building stage is complete, the loan converts to a commercial mortgage. That means instead of the principal coming due at the end of the term, it’s financed into a long-term loan. These are just a few variations on a standard construction loan. To explore the full range of construction financing options, from new construction to property upgrade and redevelopment, talk with one of our brokers.
If you’re planning to head into summer with a new construction project or a renovation, connect with us. We match you to the right loan, make it easier to close, and help you move faster, resulting in expedited outcomes.