Commercial Construction And Development Loans
“Commercial Construction And Development Loan Financing Options From Banks And Alternative Lenders”
Commercial construction loans and/or commercial development loans required for construction and development projects can be provided through conventional lenders such as banks and other main line financial institutions, and they can also be provided through sub prime and private mortgage lenders.
If you want to get a construction loan from a bank, remember that a bank or institutional lender is going to be the lower cost debt providers in the market. If your project is loan risk from a lending point of view, there will be considerable competition for your business in the market place. But if you fall below bank qualifications, either a little or a lot, you’re likely going to get the same response moving from one institutional lender to another and that response is that they can’t help you.
Our focus is on vertical construction and site development financing requests that either fall below bank qualifying, or that do not have time to complete an institutional lender’s application and approval process.
Construction Financing From Banks
Versus Alternative Lenders
Some of the biggest differences between banks versus bank alternatives that result in the client seeking non bank financing options includes 1) the security position of the lender; 2) the time to complete the application and funding process; and 3) the draw management requirements.
Let’s explore each of these.
In almost all cases, a conventional lender will not provide a construction mortgage in a second mortgage position behind an existing debt registered against the property. Arranged financing will either have to consolidate the existing debt into a new loan that will also provide the construction or development financing, or the property owner will have to make sure he or she and provide a first mortgage position where the land is already paid for.
Its not unusual that this particular financing requirement will push otherwise suitable deals into the sub prime or private mortgage market place.
Lower Cost Construction Financing Takes Time To Arrange
With respect to the application process, a conventional lender can take an inordinately long time to not only get an approval in place at times, but get funds ready to be advanced.
Because of the low cost nature of bank financing, there are also likely going to be more lending and funding conditions that need to met which will take time to complete. Length of time is many times a function of the size of the organization. The bigger the lender, the more hands and departments an application has to go through. Some organizations will have made a concerted effort to streamline their procedures in order to be more competitive in the market with some of their products…most will not.
So in order to secure the lower cost forms of construction financing, you have to start early and allow lots of time to get a loan in place. This tends to be more possible before a project starts, but construction and development financing tends to be requested at different project stages and many times there isn’t sufficient lead time to get ahead of a financing request in the middle of a project.
Non bank construction loan alternatives typically are provided through more specialized individuals or organizations where less bureaucracy exists to slow down an application for financing. Sub prime and private lenders also tend to have less exacting underwriting criteria which is offset by a slightly higher cost of capital.
Draw Management And Draw Administration
Can Influence Lender Selection
For most builders and developers, there is a significant experience base with draw management requirements and procedures as timely construction progress draws are the life blood of any project.
The reality with bank and institutional construction draw requirements is that they are typically far more rigorous and exacting that alternative financing options.
Its not uncommon for lower cost construction and development lenders will indirectly require the builder or developer to have reserve cash and/or credit to draw from in order to deal with potential draw advance delays related to third party appraisals and internal administration, and draw cut backs to provide protect to the lender that there will be sufficient funds available at all times to complete the work.
So for each project, stage of project, and financial make up of the project and its owners, a borrower may be prepared to pay a little more for a more predictable and potentially easier to manage draw schedule from a non bank source.
The key differences in most cases between institutional and non institutional construction lenders are trade offs among time and detail complexity. Put another way, in order to work with low cost construction debt, you need to have the time to manage the details.
Commercial Construction Projects
May Require Multiple Lenders
When a vertical construction project or site development project is primarily funded by an institutional lender, it’s not uncommon that secondary forms of commercial financing for smaller amounts may be required to complete certain project stages that are slightly off budget.
The main construction facility for a project typically will require work to be completed to a certain milestone before additional funding can be made available. Or if there is a cost overrun or change in scope that adds cost to the overall project, the primary lender may not be prepared to advance additional funds.
In both of these situations, alternative construction loan options are sought to provide the capital shortfall with lender security falling behind the senior lender on the project. Once again, these types of financing requests are not planned in advance, so speed in getting funds in place is also going to be important in addition to the amount of money required.
Alternative Commercial Construction Financing Solutions
Can Play Many Different Roles
Minimizing the cost of financing is always an objective for anyone borrowing money. That being said, borrowing cost, capital availability, and time all need to be balanced off when choosing a source of capital for a construction build.
As a result, non bank options can be used as the primary or senior lender for the overall project, as a bridge or short term lender to meet unplanned shortfalls, or as a stage lender to cover off one complete stage of the development such as site and servicing work before vertical construction begins.
If you are in need of commercial construction and development loans for a project you’re planning or are in the middle of, then I suggest that you give me a call so we can go over your requirements together and discuss relevant construction financing options available to you.