What Are the Best Ways to Secure Commercial & Development Construction Loans?
Commercial and development construction loans are difficult to navigate. A large developer with a long track record may have an easier time securing a construction loan, but small investors with not much capital to contribute will find that commercial construction loans are rather difficult to obtain.
Lender Types to Consider
There are more and more lenders offering construction loans, but you’ll find that the vast majority of loans come from two lenders: regional or local community banks. This is due to previous bank regulations that placed restrictions on areas where lending can occur for banks and commercial purposes.
But regulations have loosened somewhat, allowing for a larger group of lenders.
Financing can also come from:
- National banks
- Life insurance companies
- Specialty finance forms
The reason why most community and regional banks provide the loans for commercial and development construction is that these entities know the market’s area better than the competition. For example, a bank in Orlando may provide you with a loan to build an apartment complex because the bank knows the demand for affordable apartments in the area.
A bank in Neptune, New Jersey may not provide you with a loan because the bank doesn’t know the Orlando market well enough to ensure that their investment isn’t a high risk one.
Major construction loans are almost always likely to come from local lenders, so it’s in your best interest to search for your loan locally rather than going to national lenders for funding. If you have exhausted the local lender market, this is the time to spread out to national lenders and other lending outlets.
The best way to determine which banks to apply for first include:
1) Making a list of all of the banks in the area.
2) Determining lending requirements of each bank
3) Researching typical loan interest rates for each bank
And if you can’t find any information about the bank or lender, reach out to a loan manager and talk to them. Lenders are interested in solid construction projects and will help you navigate the loan application process. They will also discuss what will work best in your circumstance.
A few outlets that you can research outside of your traditional bank includes:
- Credit Unions: The growth of credit unions is massive, and these entities are often more flexible in their requirements for a loan. On the downside, credit unions often follow the same rules as banks because they often sell their loans to other lenders.
- Portfolio Investors: A tricky investment option. Portfolio investors will fund the development with their own funds, and these entities will not sell the loan to another lender. Portfolio investors is often the ideal choice for larger developers that have a history of smart developments and a credit history.
What most people overlook, especially with smaller development projects, is the mortgage broker. A mortgage broker can be an individual or company that will do all of the hard work on your behalf. These professionals will be able to scour hundreds of loan options and find the best loan possible for your development.
These individuals often work on commission, which will be tacked onto the loan at the time of closing.
It’s important to find a mortgage broker that is highly respected and experienced in the industry, as he or she may have more experience and a larger network to help you land a loan.
Two Loans You’ll Need
When construction loans are given, there are normally two loans that will be taken out. These loans make a lot of sense to lenders as they lower the overall risk for both parties. When applying for loans, you’ll need:
- Short-Term Loans: The short-term loan is meant for you to finance the entire construction of the building. This loan is given to get the development process to completion.
- Long-Term Loans: Long-term loans offer more favorable rates and durations, and are considered permanent loans. The idea behind the long-term loan is that you can accept favorable rates because you can show that you’ve leased out some of the building space, apartments and so on to prove that there is a demand in the industry.
Long-term loans are what you should seek when you have leverage to show the lender that there is demand and you’re able to lease out the building. The long-term loan will pay off the short-term loan.
There are also such things as mini-perm loans.
Mini-perm loans allow you to pay off the construction loan before refinancing.
Commercial loans are provided to the following projects:
- Non-residential properties
- Properties consisting of 5 or more units
When trying to land commercial or development loans, the above tips above will allow you to secure a loan. But what are the lenders looking for in the ideal borrower?
- Debt to Income: The debt to income ratio of the borrower is important up to a point. A bank will not take personal income into account as much if your job doesn’t provide the means to pay off the loan. Instead, two things will come into perspective:
- The borrower’s ability to manage the business and experience level
- The property’s ability to provide cash flow to pay the loan
- Credit History: The credit history of you or your business will be considered. A credit score that is high demonstrates that you have the ability to manage money.
- Loan to Value: The loan to value ratio will be a factor. Banks don’t want to be over-leveraged, and the lender will want a high equity in the project so that if the worst happens, the lender can foreclose and sell the property to satisfy their interest in the project.
- Debt Service Coverage Ratio: This is a metric that is provided only in commercial development loans. This is a ratio that looks at the property’s ability to generate cash flow. If the property doesn’t have a good ratio to generate cash, the lender will be at too high of a risk to lend money to the borrower.
Lenders look at you as an investment, and you need to prove that your development project is a safe bet. If you can prove the potential of a property and have experience within the management field of the property, you’ll be able to secure a loan.
LandCentury.com specializes in selling wholesale real estate at the lowest prices. We believe that everyone should have the right and the opportunity to get a great deal on investment property All you have to do to get the property you’ve always wanted is follow these simple steps:
Step 1: Find the Perfect Property
Use LandCentury.com’s powerful network of real estate listings to find the property of your dreams. We have everything from move-in ready investment properties and cheap houses to rural land, buildable lots, and fixer-uppers. No matter what type of real estate you’re looking for, you can find it at LandCentury.com
Step 2: Click the Buy Button
This will start the purchase process. As one of America’s top online property listing sites, we leverage our unique business model of submitting an online payment to hold the listing to make transactions straightforward and secure. Our purchase process is designed for simplicity and security. Once you click the buy button, you will:
Use our secure site to submit your processing fee. We make every effort to protect your privacy. That’s one of the reasons why we offer a 24-hour money back guarantee on your processing fee, so you can feel confident in your transaction.
The seller will contact you within the next 24 hours procced to the next step and get the necessary info to prepare the contract.
Buyer Transaction & Privacy Protection
LandCentury.com stands behind our buyers, and we want you to know that your hard earned money is safe when doing business through us. That’s why we have a number of features to help protect buyers, including:
Symantec Secure Site SSL certificate, providing a $1,500,000 warranty on every transaction
Secure encryption and data protection
24 hour money back guarantee on processing fees
2 separate legal offices across the country to help you with any problems you encounter, anytime
Seller ratings so you can see what other people have to say about their experience with your seller
Still Have Questions?
We’d love to answer them. Check out our Help Center page or call us at 1-888-LAND-WEB (526-3932)
Our highly specialized support team is ready to find a solution to your problem. A people first policy insures that a team member will always be available to speak with you personally.
Symantec SSL Certificate
Symantec is a global leader in providing security, information management solutions to help our customers – from consumers and small businesses to the largest global organizations – secure and manage their information against more risks at more points, more completely and efficiently than any other company. Our company’s unique focus is to eliminate risks to information, technology and processes independent of the device, platform, interaction or location.
This website can secure your private information using a SSL Certificate. Information exchanged with any address beginning with https is encrypted using SSL before transmission. LandCentury.Com LLC has been verified as the owner or operator of the website located at www.LandCentury.com. Official records confirm LandCentury.Com LLC as a valid business.
Better Business Bureau
For more than 100 years, Better Business Bureau has been helping people find businesses, brands and charities they can trust. In 2015, people turned to BBB more than 172 million times for BBB Business Reviews on more than 5.3 million businesses and Charity Reports on 11,000 charities, all available for free at www.bbb.org. The Council of Better Business Bureaus is the umbrella organization for the local, independent BBBs in the United States, Canada and Mexico, as well as home to its national and international programs on dispute resolution, advertising review, and industry self-regulation.
BBB has determined that LandCentury.Com, LLC meets BBB accreditation standards, which include a commitment to make a good faith effort to resolve any consumer complaints. BBB Accredited Businesses pay a fee for accreditation review/monitoring and for support of BBB services to the public. BBB accreditation does not mean that the business’ products or services have been evaluated or endorsed by BBB, or that BBB has made a determination as to the business’ product quality or competency in performing services.
Web Site Anti-Malware Scan
GeoTrust is the world’s second largest digital certificate provider. More than 100,000 customers in over 150 countries trust GeoTrust to secure online transactions and conduct business over the Internet. Our range of digital certificate and trust products enable organizations of all sizes to maximize the security of their digital transactions cost-effectively.
The GeoTrust Web Site Anti-Malware Scan includes a daily malware scan to detect malware and alert you with detailed information to respond quickly to the attack. What happens if malware is detected on this web site? If malware is discovered, the GeoTrust Web Site Anti-Malware Seal no longer displays. When the scan confirms that all instances of malware are removed, the seal displays again.
If you feel that you have been a victim of real estate fraud, there are many resources available for you as the victim. Your first step is to contact the local District Attorney’s office and report the incident. Our office will stand by you and provide any relevant information to support your claim. Here are additional agencies that can assist you and provide more resources: