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Commercial Construction Loan Down Payment

The down payment required for a commercial construction loan ranges from 10% for SBA, 15% for HUD Loans and  up to 30% for commercial banks, life companies, and private lenders. Your equity in the land if you have owned it for more than 2 years may be applied at fair market value towards the down payment.

Five Key Factors for a Commercial Construction Loan Down Payment

1. Determine the Loan constraints – Is the loan constrained by NOI or Cost?
2. Determine the value  the lender will give you for the land
3. Can you apply your developer fee towards the down payment?
4. Will the lender really give you the maximum size loan?
5. Choose the loan program that gives you best down payment


5  Key Factors for a Commercial Construction Loan Down Payment

Determine the Loan Constraints -  Ideally you want the loan amount to be constrained by construction cost, not the projected net operating income of the property.  This will insure that if interest rates go up prior to loan approval your down payment requirement will not increase. All commercial construction loans start with an estimated annual mortgage payment and calculate an estimated debt service coverage ratio (DSCR) for the perm loan and work backwards to the construction loan. You will need to do a pro forma or projected income and expense estimate and net operating income for the completed stabilized property. The problem with loans constrained by net operating income is that if rates go up your debt service coverage will go down and this can result in a larger down payment. Commercial construction loans constrained by the construction cost(for example: 75% of cost) are more likely to not need an additional cash injection at the closing of the construction loan.

Determine the Value the Lender will Give You for the Land – If you already own the land that needs the commercial construction loan, call your lender and ask how much value they will give you for it towards the down payment. If you have owned it for more than 4 years, almost all lenders will give you the current appraised value for the land. However, if you have let’s say purchased it in the past 2 years or less, most lenders will only give you the value based on what you paid for it – even if you got it at a great bargain. Often developers assume that if they purchased the land below fair market value, and then did zoning and entitlement work on it that the lender will automatically give them much more value than they paid for it. But more often than not for land that was purchased recently, this is not the case.

Can you apply your developer fee towards the down payment – Most commercial construction lenders will allow you to charge a developer fee some where between 4.00% and 6.00% of the construction costs. Ask your lender if you can apply this amount towards the down payment requirement. If allowed, you lender will finance the fee as one of the project costs and you will have to come up with a bit less down.

Will the lender really give you the maximum size loan? More often than it should be, especially at commercial banks, you will be given a letter of interest showing that your commercial construction loan is based on a percentage of cost that you desire. But once the loan goes through underwriting and loan approval, the lender approves a lower amount. This can be a complete disaster for your project if you do not have or do not desire to put in additional cash. This usually occurs because the lender did not do enough due diligence prior to starting the loan or have the credit manager review the file. Commercial construction loans require strong experienced sponsors (borrowers) and development team – developer, general contractor, architect and property management company. Often the lender issues the letter of interest to tie the deal down, but does not pre-qualify the deal thoroughly enough. The best way to make sure this is not likely to happen is to have an experienced commercial mortgage broker submit you loan. Or if you have the experience make sure that you have sent the lender everything they will need upfront and that whomever is going to approve the loan has reviewed the package and pre-approved it.

Choose the loan program that gives you best down payment – And I should add – that you qualify for. Here is the bottom line. You can really spend a lot of time trying to find the construction loan with the lowest down payment. But do you qualify for this loan? And do you know all the terms? Are you confident the lender will come through with the size of loan you desire? When you first talk to a lender about a commercial construction loan they will almost always tell you that the loan is based on a percentage of cost – let’s say 75%. That might be their maximum loan to cost and this percentage will likely stick in your mind.  However, there are a many variables that ultimately will determine the maximum loan and your down payment requirement. These are: the projected net operating income of the completed leased property, the borrowers experience, financial strength and credit. Plus, as mentioned in number 4, the experience of your development team. If any of these criteria end up not being what the lender originally thought, your construction loan may be reduced to 65% or 70%. Call one of our friendly loan specialists at Apartment Loan Store. We have been lending on commercial construction for over 20 years and have 8 programs and over 50 lenders to choose from. We can save you time and money by prequalifying you accurately for the loan programs you qualify for. We will also go over the terms and underwriting criteria for all the commercial construction loan programs you are interested in.


Here Are our  8 Construction Loan Programs and their Down Payment Requirements:

1. FHA (Also known as HUD) New Construction Loan or Major Rehabilitation Loan

For Multifamily only. This loan program has the lowest down payment available for commercial construction based solely on cost with no percentage of appraised stabilized value – 15% down, however, there is an exception – 13% down if the new construction project is affordable housing.


2. Private Institution New Construction Loan
As little as 20% down on new construction financing


3. National Bank Program
Maximum new construction loan down payment of 30%


4. Regional Bank Program Loan
Maximum new construction loan down payment of 25%


5. Community Bank Program Loan
Up to 25% down on new construction financing


6. Life Insurance Company Program Loan

Up to 30% down on a new construction loan


7. Hard Money Multifamily New Construction Loan
AS little as 20% down.


8.  SBA (Small Business Administration)

As little as 10% down on the SBA 7A Program and 15% down for the SBA 504 Program


By:  Terry Painter/President   Apartment Loan Store and Business Loan Store