Private money and hard money lenders can often provide the first round of your construction financing when large banks will not.Which is of the case since commercial construction loan requirements are so strict.This is especially helpful when you need to fund your construction loan quickly.
How do Commercial Construction Loans Work?
Graco Commercial Capital fully understands the unique characteristics of short term commercial construction loans, along with their many moving parts and complex deal structures. Our company understands the needs of both our borrowers and of our funding sources, thus helping us to negotiate the best overall loan terms for our clients. These include the interest rate, the maximum leverage the borrower can obtain and the repayment terms.
By loan closing, Graco Commercial Capital will have negotiated critical understandings, such as property insurance and the construction contract between the developer and our lender. The contract specifies how the developer can draw loan funds, subject to architect's sign-offs and lien waivers. The contract commits both sides to complete the project, under the terms of the contract. The end goal is the receipt of the Certificate of Occupancy (COO), which satisfies the borrower's requirement for the last loan installment and the lenders' requirement for sufficient collateral to protect its investment - it's only after the COO is issued, and after the property is leased to stabilization, typically 95% leased, that the property reaches its full liquidation value for purposes collateral.
What are the Requirements for a Construction Loan? Banks are typically the primary source of commercial construction loans. They underwrite these loans by examining many data points, including project information and the documentation prepared by the borrower. The lender must weigh a host of factors, including the projects most current proforma just prior to loan submission, local market conditions, the construction budget, the history of the development team and the financial capacity of the loan guarantors. And of course, any special project specific risks must also be carefully reviewed and considered.
Loan to cost ratio: The LTC ratio equals the commercial construction loan amount divided by estimated total project cost. Typically, commercial construction loans have a LTC between 80% and 100%. The remainder of the funding comes from the borrower's equity. In some cases, we have been able to provide 100% LTC through our special program. This program is for the higher end construction deals where the client has at least $1 million in liquid assets.
Loan to value ratio: The LTV ratio equal the fully disbursed construction loan amount divided by the estimated value of the property when complete. This value is usually close to 80% but can be higher.
Debt Service Coverage Ratio: DSCR equals the proforma net operating income of a propose property divided by the estimated annual interest and principal payments on the permanent takeout loan (not the commercial construction loan, which is an interest only loan). Typical DSCR values for commercial loans can exceed 1.25.
Profit Ratio: The projected profit ratio equals the completed property s estimated profit divided by the estimated total cost. Lenders typically desire a projected profit ratio of 20% or greater. Lenders require a decent profit ratio to have confidence that the borrower has sufficient motivation to complete the project.
Net Worth to Loan-Size Ratio: This ratio is the developers net worth divided by the commercial construction loan amount. Look for a value greater equal to or greater than 1.00, since a lower value would mean the developer had insufficient resources to cover the loan in the even of default.
Documentation: Putting together a loan application for commercial construction financing requires far more than just filling out a form. The borrower, working with its professional representative, needs to assemble and present full documentation, including a business plan, earning projections, contractor's estimates and financial documents, for both personal and business. A business plan contains enormous amounts of technical and financial data, including discussions about site location, retail/residential/mixed-use, feasibility studies, building size and number of stories, unit sized, mechanical plans (plumbing, electrical, ventilation, floor plans, finish standards, etc.) amenities, parking and signage.
Commercial Loan Agreements: If a borrow and lender come to terms on commercial construction financing terms, a loan agreement will be drawn up, and signed, stating all of the terms. It will include a disbursement schedule specifying how and when loan funds will be disbursed and available to the borrower, and a discussion of how change orders will be handled.