Commercial Construction Financing

Commercial construction financing is sought for the purpose of constructing a new building or renovating an existing building. Commercial construction financing is usually for very large amounts and can be difficult to obtain. Reliable financing is critical to the success of your construction project.

Commercial mortgages offer several benefits over renting property. One of the most significant benefits is ownership. Instead of just providing space for your business, your monthly payments now help build equity. This will help you in future undertakings such as expanding your business, buying new equipment or updating the property. Also, the interest is tax deductible, which lowers your company’s gross taxable income. Another advantage of commercial mortgages is that the loan is usually assumable. This means that if you decide to sell the property while still carrying the mortgage, a qualified buyer can take over the terms of your existing loan without needing to go through an extensive approval process.

Commercial construction financing is designed to pay for the development in stages. By providing collateral, usually by pledging the land, the lender will disburse funds according to the schedule of production for the project. We can discuss some of these forms of commercial construction financing.

A permanent loan is a long term first mortgage. Any first mortgage loan on a commercial property with a term of at least five years is considered to be a permanent loan. A 10 year term is about as long of a term as most commercial lenders will go. Permanent loans are usually amortized over 25 years. A takeout loan is a permanent loan that pays off a construction loan. After the building is completed and leased, you look for a lender that will give you a takeout loan to pay off your commercial construction lender. A takeout loan and a forward takeout commitment are not the same thing. A forward takeout commitment is just a very expensive letter that promises to deliver a takeout loan in the future if the property is completed according to plan and leased at the target rate.

You might also consider a mezzanine loan. Mezzanine loans are similar to second mortgages, except a mezzanine loan is secured by the stock of the company that owns the property, as opposed to the real estate. Mezzanine loans are fairly big. It is hard to find a mezzanine lender who will make a loan of less than $2 million. In addition, mezzanine lenders want big projects. If the commercial construction financing that you are seeking is not close to $10 million, you may have a hard time finding a lender.

An investor seeking commercial construction financing might look at taking out a bridge loan. A bridge loan is short-term financing which is expected to be paid back rather quickly by a subsequent long-term loan. It may also be called a swing loan or known simply as bridge financing. The typical commercial property bridge loan has a term of six month to one year. Many commercial lenders will grant the owner the option to extend for six months to one year for a fee of between a half-point up to two points. Commercial property bridge loans are usually paid off when the owner places permanent financing on the property.

Getting commercial property financing is a time consuming process. You must provide significant documentation, including all of your business records from the last three years. This may include income, rent rolls, business plans and other proprietary information. It will usually take about four months for all of the paperwork to be processed. Even after you receive the loan, you may still need to provide regular financial updates to the lender to demonstrate your financial stability.