By Terry Painter/Mortgage Banker, Author of “The Encyclopedia of Commercial Real Estate Advice” – Wiley Publishers, Member of the Forbes Real Estate Council
Commercial Construction is the remodeling or ground up construction of commercially zoned buildings for Apartments, Self-Storage, Industrial, Office, Retail, Medical, Schools, Hospitals, Small Businesses and Hotels. Prices per square foot range from $10 for industrial to over $150 for Apartments and office.
Can You do Your Own Commercial Construction without Experience?
Let’s say that you have a substantial knowledge of construction and maybe have built, or substantially remodeled your own home or a rental. Now you want to build a 6-plex apartment building. Can you extrapolate this into becoming your own commercial construction contractor? Well, it can be done, but it’s not going to be easy. First of all, you are going to need a contractor’s license. In most states this will entail your passing an exam and posting a surety bond that will protect clients, lenders and subcontractors. On top of that, you need proof of liability and workman’s comp insurance. If you are planning on construction financing your lender will want to know that you have the experience to actually build this and want to review your building plans and construction budget. To add to this list, it would help to have some basic knowledge of the professionals you will need to team up with mentioned later in this article. In my book “Encyclopedia of Commercial Real Estate Advice”, I go through just about everything you will need to know and the entire process of commercial development and construction. In this article, I cover many of the basics.
How is Commercial Construction Priced?
The price per square foot for a steel industrial building can range from $10 - $18 per square foot depending on interior finishes. Self-Storage buildings average from $20 - $45 per square foot depending on if you are building steel or concrete buildings. Apartment complexes average from $150 per square foot for basic garden style, to over $300 for mid-high rise luxury life style buildings in large cities.
It is misleading and may lead to a financial disaster to budget a commercial construction project based on price per square foot. I have witnessed actual construction budgets based on bids or quotes from subcontractors easily run 20% more than a cost per square foot estimate. The only way to get an accurate construction budget is to have plans and specs and have subs give you a bid based on actual dimensions and the quality of all materials.
Why Value Engineering is Important
Value engineering is the scrutinizing of all components of construction including square footage, height, engineering, and materials and finding ways to cut building costs. To get the best results, team up with your architect and civil and structural engineers. Together you can brainstorm ways to cut cost while preserving the quality of the project. The bottom line is that the cost of commercial buildings is limited by the projected net operating income of the proposed building. If you spend too much on construction and it doesn’t have enough positive cash-flow once it is leased out, you are in trouble. I have been amazed by value engineering where a structural engineer lowered the height of a building to decrease cost of the foundation and building materials. Also, on one large apartment complex just substituting hardy plank siding for stucco reduced the construction budget by close to a million dollars. On another project, carports were substituted for garages. On another, there were four different configurations for kitchens on a multifamily project. After value engineering all the kitchens were designed to be identical so that cabinets and granite counter tops could be purchased based on identical bulk components.
Financing for Commercial Construction
1. Commercial Banks
Most construction financing in the United States is obtained from local community banks. They know their own backyard well and will know if a commercial construction project will be successful there. They prefer that the contractor and developer be experienced, but will let someone get their foot in the door if they have an experienced team. Banks usually lend from 65 – 75% of cost. Owners and key principals of the project need to have 700 credit scores and above, the down payment, closing costs plus additional sources of income.
2. Credit Unions
Credit Unions are new to commercial construction lending and they mostly do consumer financing. They also know their own backyard well. They are more picky than banks and will usually lend up to 75% of cost. They prefer experienced contractors, owners and key principals with credit scores of 680 and above. Cash required at closing will be the down payment, closing costs and 10% post-closing liquidity. A good source of outside income is a plus.
HUD does construction non-recourse financing for apartment buildings, senior living, assisted living, nursing homes and hospitals. Loans should be at least $5 million or above. HUD lends up to 85% of cost. An experienced developer and general contractor is required. Good credit scores, plus some post-closing liquidity is required. This program has some of the lowest construction loan rates and your construction loan seamlessly rolls over to a 40-year fixed, fully amortizing permanent loan at the same low rate as the construction loan.
4. Life Companies
Life companies require larger construction loans of $10 million and above. The projects need to be in larger cities. They lend up to 65% of cost and require very experienced developers, contractors and key principals. Key principals need to have a net worth that equals one and a half to twice the size of the loan, strong outside income and at least 20% of the loan in post-closing liquidity. Life companies can roll your construction loan into a very low 10 to 25 year fixed-rate permanent loan.
To view Apartment Loan Store’s top multifamily construction loan programs go to: https://apartmentloanstore.com/loan-product/construction-loans
10 Essential Commercial Construction Specialist Contractors Team up With
1. Land Use Attorney
They advise you on zoning, easements, construction permits, entitlements, and all land use ordinances. Be sure to bring them with you to city planning staff meetings.
They draw up your plans and specs to meet building codes. They team up with civil and structural engineers, landscape architects, soils consultants and mechanical, plumbing and electrical engineers.
3. Civil Engineer
They layout the footprint of the buildings plus the location of walkways, parking lots, storm drainage, and all utilities.
4. Structural Engineers
They work with the architect and soils consultant to make sure that the foundations and building structure can support the weight of the building.
5. Geotechnical Soil Consultant
They determine if the characteristics of the ground can support the proposed weight of the buildings and make sure the structures are earthquake proof.
6. Mechanical, Plumbing and Electrical Engineers
They design the plumbing, electrical, and HVAC systems to code.
7. Environmental Consultants
They determine if there is contamination in the soil and ground water on the site and the surrounding sites.
8. Landscape Architect
They design the location of plants and trees, walkways and outdoor common areas to meet the developers requirements and city codes.
9. Transportation Consultants
They measure the impact the buildings will have on existing roads and intersections and the people who already live and work in the location.
10. Land Planners
They work on larger projects designing topographical maps that show the unique features and constraints of the land.
For more information on construction loan rates, check out our Commercial Construction Loan Rates page HERE
By Terry Painter/President Apartment Loan Store and Business Loan Store
Author of “The Encyclopedia of Commercial Real Estate Advice” – Published by Wiley
Member of the Forbes Real Estate Council
Multifamily Mortgage Bankers and Brokers since 1997
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