By Terry Painter/Mortgage Banker, Author of “The Encyclopedia of Commercial Real Estate Advice” A Wiley Publication.
With the Feds raising short term rates 8 times from March 2022 through January of 2023 by 4.50%, this increased most Commercial Construction loan rates astronomically. Almost all construction loans are tied to either prime rate or the SOFR index and go up or down every time the Feds change rates. Community banks typically price their commercial construction loan rates at prime (floating) plus 1.00 – 1.50%. With prime rate being 7.75% at the time of this writing, this puts the rate at 8.75% to 9.25%. Of course, for riskier projects they would love to get prime plus 2.00%, but this is not achievable today. Rates this high have effectively lowered loan to cost amounts from 75% to 60%. To counter this, many banks are offering their customers prime plus .50% or for their best developer customers prime floating.
National banks and many larger regional banks price their commercial construction loans to the Secured Overnight Financing Rate (SOFR). Today the SOFR rate is at 4.55%. To this they add a spread of between 2.75% to 3.75%. This puts their construction loan rates at 7.30% to 8.30%. Be sure to bargain when them. If they won’t lower their rate, tell them you are shopping them at another bank that will.
Why Large Banks are Like the Oil Companies
The truth is that just like the oil companies that have made a bundle on oil prices going up as a result of the Russian war in Ukraine, large banks are making extra high profits on construction loans over the last year as a result of the Feds raising short term rates. Unlike smaller banks that often have to borrow money from the Feds and other banks, these large institutions have much more money to lend than they have customers. So, their cost of funds only goes up what they are paying depositors and does not go up when the Feds raise rates. So when the Feds raise short term rates, these lenders make a fortune on not only their construction loans, but also all their business loans – lines of credit plus inventory and accounts receivable financing. This equates to extra earnings which goes right to their bottom line. Again, be sure to bargain with these lenders. If they don’t lower your rate, tell them you are shopping them at another large bank that will.
Commercial Construction Loan Rates vary from around 6.10% for a HUD 221(d)4 Multifamily loan to 12.00% for a hard money loan. FHA Commercial Construction Loan Rates for Multifamily are partially regulated by HUD and are some of the lowest commercial construction loan rates in the country right now. HUD guarantees the loan which makes it possible for the lender to sell the loan on Wall Street as a Gennie Mae Bond. It is actually the bond trading firms on Wall Street that will determine the final rate which can be locked at final HUD loan approval. These rates are not only locked at loan approval for the entire term of the construction loan but for an additional 40-year on the Permanent Loan. Call one of our friendly loan specialists to get prequalified for this program.
Life companies have a lot of money to invest and have some of the lowest commercial construction loan rates available in America. They tie their rates to the SOFR rate. However, these programs are more difficult to qualify for; they take a very experienced development team, and require financially strong sponsors.
The best private lenders have their money in a fund and lend at prime plus 2.75% to 4.00%. This puts their rates at 10.50% to 11.75%. Some private lenders borrow their funds from a warehouse line of credit that is already high since it is likely tied the SOFR rate. Their rates will run from 9.75% to 12.00% today. For smaller construction loan projects this can still pencil. These loans are much easier to qualify for and require less experience and financial strength from the developer and investors.
Finally, we have hard money construction loans with rates from 10.00% to 12.00% and many points. These loans exist for developers that do not have good credit, or verifiable income on tax returns. These loans still require experience with similar size projects from the developer, general contractor, and often the investors.
At Apartment Loan Store, and Business Loan Store, we have specialized in commercial construction loans since 1997. Please call one of our friendly loan specialists to get prequalified for your project.
By: Terry Painter/President Apartment Loan Store and Business Loan Store