How to Get a Construction Loan for Commercial Real Estate

How to Get a Construction Loan for Commercial Real Estate

From Syed Kashif Ali

When buying underutilized land or run-down properties, you must acquire commercial real estate construction loans to make the land and any buildings on it, habitable.

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When buying underutilized land or run-down properties, you must acquire commercial real estate construction loans to make the land and any buildings on it, habitable.

Construction loans are often risky for lenders because these development projects can range from a few thousand dollars to hundreds of millions of dollars. The type of financing you will require depends largely on the type of construction project, how much land has already been developed, and whether the construction loan will be temporary or long-term.

It's a good decision to consult with a commercial mortgage broker like Clopton Capital to begin the fast and easy process of getting approved for Commercial Real Estate Construction Loans.

Here, we’ve taken a full guide on how to get a construction loan for commercial real estate.

How to Get a Commercial Construction Loan

Commercial development has a significant level of risk, and obtaining financing can be difficult if the developer and those engaged do not have a solid track record of successful projects.

A developer may have or be able to find the funds to purchase the land or properties outright, which they can use as full or partial collateral for a construction loan. Developers can also utilize other properties as collateral if they have adequate equity in them.

Banks provide the majority of commercial construction loans, but companies may also look for investment from venture capitalists or private investors. Commercial construction loans are also available from government organizations and their affiliates.

How to Increase Your Chances of Loan Approval

When applying for a commercial real estate loan, business owners with low credit or new business might face greater challenges. You can improve your chances of getting better by doing the following things:

  • Getting rid of debt and taking other efforts to boost your credit score

  • If you have it, pledge more collateral.

  • Adding a cosigner or investor

  • Accepting a higher interest rate and a greater down payment

  • Choosing a less expensive property

Let’s turn your eye to the main point of the types of commercial real estate construction loans.

Land Development Loan

Land development's purpose is to prepare a piece of land for future construction rather than to present it as a finished product. When you have raw or undeveloped land that has to be developed, you can get a land development loan. After the raw land has been developed, it can be subdivided and sold as individual lots for commercial or residential purposes.

Plus, Sewer, water, and power lines can all be installed with the help of a land development loan.

Mini Perm Loan

A mini-perm loan, like a bridge loan, is a kind of short-term commercial financing. This type of loan is a temporary loan usually used to produce a great construction or commercial property loan on a project that will generate revenue once completed.

The mini-perm loan might be replaced by long-term financing after up to seven years. Commercial banks are the most common source of mini-perm loans.

Interim Construction Loan

A short-term commercial construction loan is known as an interim construction loan. It's utilized to cover the costs of labor and supplies for a commercial construction project. The term of an interim construction loan is usually 18 to 36 months. It is settled once a long-term mortgage is in place as it is short-term financing.

A&D Loan

A&D loans, or business acquisition and development loans, are a form of business loan that is used to fund the acquisition of land for development and the construction of on-site upgrades. These loans can also be used to rehabilitate infrastructure or existing buildings on the underutilized or run-down property that has already been developed.

An A&D loan normally covers the cost of both the land and any improvements that are required before the development can be finished.

Takeout Loan

A takeout loan gives long-term financing for commercial projects that currently hold a short-term loan, such as a construction credit. More concretely, a takeout loan, also known as takeout financing, is a permanent type of financing that a lender agrees to provide at a specific date or when certain project completion criteria are met. Lenders may require their developers to gain a takeout loan before issuing a short-term loan, especially if the development is deemed risky by the lender.

Crowdfunding

Crowdfunding is a new method of commercial project financing that takes together a large number of small investors to pool funds for particular projects. Rather than asking traditional banks for financing, developers can use a crowdsourcing site to raise the necessary capital.

Smaller or less experienced investors may be able to participate depending on the project and the crowdfunding platform. As crowdfunding becomes more popular, more platforms will open up for smaller investors with low net worth to participate, and more commercial real estate projects will be able to find financing.

The Bottom Line

Commercial real estate construction loans are one of the best sources to find financing. It is as easy as difficult in terms of functionality, even though there are various types. However, when you are preceding this process, firstly choose the type of the loan and then gather all the credentials required for the loan obtaining. Of course, you will evaluate the loan interest rates to predict that you are safe in the future.

Furthermore, when evaluating commercial real estate loans, lenders also consider the loan's collateral, financial ratios for instance the loan-to-value ratio and the debt-service coverage ratio, and the entity's creditworthiness, which involves three to five years of financial statements and income tax returns.

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