Taking on a commercial construction project is no small feat. In addition to the labor and materials that go into every stage of construction, there’s a lot that has to happen even before the first brick is laid. A vital piece for your project to make it from concept to final inspection is sourcing the right financing. Without that, all of the careful planning and drafting could be a huge waste of time.
In fact, most banks will walk away from 90% or more of the construction projects that come to them. These projects are not in their wheelhouse, and the risks make FDIC insured funds an unlikely source of most construction jobs, especially if there’s anything unique about your project.
It’s important to find a reliable lender that will work with you to negotiate the terms of your loan. Construction loans come from a variety of lenders, many of them in the private lending or SBA backed lending arena, but many of these lenders have similar requirements. Making sure you meet the basic criteria before applying for a loan will increase your chances of being approved. It’s also a good idea to have a broker on your side who will match you with a suitable lender.
So how do you get the right financing, what does it look like, and who can help you get it? This article will answer those questions and more as we take a deep dive into commercial construction financing. Whether you’re a business owner looking to expand into commercial real estate or a contractor looking for a construction loan, the following advice will help you get started on the right track.
Getting the Loan
Suppose someone you know asks to borrow money. You’d want to know a few things first, such as what the money is for, when you’ll get paid back, and how the person plans to come up with the money to pay you later on. So, it’s no surprise that a professional lender wants the same foundational information. When it comes to construction, there are many moving parts, making the risk higher than with a commercial real estate acquisition, for example.
When you get a loan for a house, a vehicle, or machinery, the lender bases your loan on something tangible. In the case of a construction loan, the property the lender is paying for does not yet exist. Certain assurances have to be in place that guarantees the lender will get a return since they can’t seize the asset in question.
To start, you’ll need an independent appraisal and market feasibility study. These will help validate the value of the finished project and support any claims you’ve made in the planning. Assuming you plan to rent the building once it’s up, how long will it take for you to fill it with tenants? Is your proposed rent supported by the market and will it be enough to support repayment on the loan?
Details of your business and your contractor’s financial history are critical to the lender’s decision. A three-year financial history, business and personal credit reports, licenses, certifications, and references will be required. Regarding the project itself, you’ll need to show architectural plans, zoning approvals, environmental testing, independent financial assessments, and any project-specific professional reviews.
Negotiating a loan agreement isn’t all about pleasing the lender. Make sure you’re getting what you want from the deal too. In addition to the financial details of the loan, find out what the lender’s time frame is. There are the key steps in the process from the initial credit analysis to supervisory and committee approvals, and the final closing. Ask the lender for expected completion dates for each step.
Before closing, you need to have an attorney review the loan agreement. The lender should provide you with a list of the due diligence documents required to close the loan. These include your business’s articles of incorporation, bylaws, and legal certifications. A title search, lien and bankruptcy searches, insurance, and proof of UCC filing will also be required. The lender will expect you to provide these at your own expense.
Getting the Funds
The construction loan agreement, in addition to defining how much money you’ll get and how your lender will be repaid, sets up the draw schedule. The draw schedule is one of the features that set construction financing apart from other types of loans. Instead of a lump sum upfront, construction loans provide a portion of the funds at each stage of construction. How and when those portions will be paid out is defined by the draw schedule.
The draw schedule is important because it helps to keep your project on track. It outlines specifically what work needs to be completed at each stage in order for the lender to release funds. You’ll need to send a request to the lender before each draw. With your request, you need to submit proof that the project has met all of the requirements of the draw schedule thus far. This requires the services of a loan officer.
The loan officer, or inspector, plays a critical role in the construction process and you’ll want to be as cooperative as possible with this person. They’ll be on-site frequently and need to have access to project documents. Before each draw request, the inspector will submit a report to the lender. This report includes a checklist of completed work, billable hours, photographic proof of work done, and any professional permits or inspections that you and the contractor have obtained.
Inspections work in your favor, even if it doesn’t seem like it at first. Your inspector can catch small problems before they turn into major ones. They help you stick to your timeline and keep your documents organized. If part of the project hasn’t been completed to plan, you’ll be able to correct it before it affects other parts of the project. This can help weed out labor issues or communication problems with the contractors.
Getting the Right Help
Overseeing a construction site, verifying vendors, bringing in equipment, hiring subcontractors, communicating with staff, receiving and ordering materials, and budgeting for a construction project is quite a lot to handle. Unless you have extensive experience doing this on your own, you’re going to need help. That’s when it’s time to turn to a general contractor or GC. What is a GC?
A commercial general contractor specializes in all of the tasks above and more. But before you hire one, make sure you’re getting an experienced professional you can rely on. First and foremost, make sure they’re licensed to do construction in your area. This includes all licensing and certifications required at the city, state, and federal levels. Once you’ve verified their legal qualifications, evaluate their experience. See if they’ve completed projects similar to your own. Look over reviews, testimonials, and any references they’re willing to provide. If possible, visit a job site or completed project location.
Your GC helps define your project scope and aids in the borrowing process. They’ll be part of the loan application and will oversee your entire construction project through completion. Before you submit your construction loan application to the lender, the GC will help you get the required assessments, put together the budget, and make sure your plans comply with zoning codes.
During the construction phase, the GC communicates with vendors to get the materials you need at the agreed prices. They determine what equipment will be required for each stage of the job and handle the logistics of getting it on site. The GC handles reporting, budgeting, and compliance at each phase so you can submit a complete draw request. If there’s a question about the project design, the GC communicates with the designers and architects to make sure the work is accurate.
Building real estate to add to your business portfolio is a complex process with a lot of moving parts. With the right help, your project will go smoothly, even if there are hiccups along the way. Pay close attention to the team you assemble. A knowledgeable broker, professional lender, reliable contractor, and diligent inspector are indispensable. With these people in place, you’ll have a strong foundation for any project. You can rely on our team’s experience sourcing funds for construction. We help bring people together around an agreed-upon budget and pool of funds to get your construction project moving.