May 20, 2016
This article is going to focus on some differences between commercial new construction loans and investment real-estate loans. When we think of investment real-estate loans, we mean loans for existing commercial properties already built.
The following are 5 differences between commercial new construction loans and investment real-estate loans:
- There is vastly greater amount of complexity and knowledge required in a commercial new construction loan. Fortunately you don’t have to be deeply knowledgeable about each part. However, you need to have enough familiarity. For example, you know little about architecture, but you find out the architectural plans will be inspected. Thus you have an indication they will be done right.
There are so many more parts to commercial new construction loans. Some of which are a Pro Forma, needing a builder/developer, purchase of land, permits, full project plans, construction budget, local market needs for your particular project, etc.
- You need a Pro Forma. With investment real-estate, you typically need actual numbers to meet loan requirements. Your loan is typically dependent on historical data from income and expense. With a commercial new construction loan, you have no historical data from income and expense. You have a Pro Forma of projected expenses. This Pro Forma is done very carefully with much thought and supportive data in order that the loan is approved.
- A commercial new construction loan generally has 2 loans involved. The first loan finances for the short term. This phase finances the new construction as well as the lease up phase. The second loan is for permanent financing. This phase covers after stabilization (the property is leased up to the level of occupancy of the market). This is longer term financing. An exception to needing two loans is the HUD multifamily construction loan which has one loan involved.
- There is quite a bit more risk involved with construction loan financing. Your first loan is based on Pro Forma, not actual historical numbers. There is the risk to the lender that the project will actually be completed. There is the risk of some unknown cost increases such as underestimating project cost or cost of construction materials going up. Since the construction phase of the loan is quite a few months, there is the increased risk of an adversely changing economy.
- Having experience in investing in commercial new construction is more important than having experience in investment real-estate. This is because there is much more risk and many more parts. Lenders could require you to have experience. You may need a partner who has experience. And it certainly would be a good idea if you are not experienced in commercial new construction and financing.
Contact us to see if you pre-qualify for our best multifamily, commercial, bridge, construction, or business loan rates and terms. Also, contact us if you would like to discuss your particular commercial lending needs, or if you have any questions. Call 214-695-7310, or send an email to email@example.com
Bruce Painter, Director of Marketing, Business Loan Store