Commercial Construction Loan Financing

Commercial construction loan financing is a dynamic process. With traditional commercial mortgage loans, typically all loan proceeds are funded to the borrower at the time of loan closing. In contrast, with commercial building loan financing the loan proceeds are funded to the borrower in increments, as the project is being built. The construction lender usually inspects the work and verifies lien waivers from the contractors before making subsequent loan disbursements. Sometimes this construction monitoring and disbursement is handled by the lender, and sometimes it is outsourced to a third party who is put in charge of handling the construction loan disbursements.

Construction loan inquiries

Sometimes commercial construction loan financing is hard for many borrowers to obtain. However, Financial Compound is an active commercial mortgage broker working with numerous, currently active, industrial construction loan financing lenders. We welcome all construction loan inquiries. So long as the demographics support the construction request, and the loan requested as a percentage of the project cost is reasonable, along with borrower credit and equity support, Financial Compound can place and close the wide variety of commercial building loan financing requests that exist in the marketplace today.

Financial Compound processes commercial construction loan financing for industrial buildings, hotels, apartment buildings, townhomes, condominiums, single-family developments, and retail shopping centers. Financial Compound has noticed that it is more difficult to obtain a construction loan than before the credit crunch in 2007, but certainly possible and practical.

 

How do commercial construction loans work?

When it comes to commercial construction loan financing, there are a few different options available. One common option is to secure a construction loan from a bank or other financial institution. Construction loans are typically short-term loans that are used to cover the costs of building a new commercial property. The loan is usually repaid once the construction project is completed and the property is sold or leased. Another option for commercial construction loan financing is to use private equity or venture capital.

This approach can provide more flexibility in terms of how the project is financed, but it can also be more risky. Private equity and venture capital firms typically invest in projects that they believe have high potential for return on investment. As a result, they may be less willing to finance projects that are considered to be higher risk. Ultimately, the best approach for financing commercial construction will depend on the specific needs of the project.

 

Construction Disbursement Schedule

Once you’ve been approved for the loan and have signed the loan agreement, the lender will begin disbursing funds to you. Typically, the lender will release funds in stages, as progress is made on the project. For example, they may release funds for the purchase of land, followed by funds for the construction of the actual building. As each stage of construction is completed, the lender will require lien waivers from the contractor and subcontractors, proving that everyone has been paid and is satisfied, and then the lender will release additional funds.

Commercial Construction Lending 101

A lien waiver is a document that states that you have paid all contractors, suppliers, and workers who have worked on your project. This ensures that the lender will not be held liable for any unpaid bills. Without lien waivers, the lender may refuse to release further disbursements of funds for lack of compliance with commercial construction loan requirements.

Obtaining construction loans and lien waivers can be a complex process, but it’s important to understand both in order to successfully finance your commercial construction project.

 

Commerical Construction Loan Financing Interest Reserve

A construction interest reserve is an account that holds funds collected from a borrower during the construction phase of a commercial real estate project. The purpose of the account is to provide the lender with protection against the risk of non-payment by the borrower during this period.

The funds in the account are typically used to pay the interest on the loan during the construction phase, and any remaining funds are returned to the borrower at the completion of the project. Construction interest reserves are generally required by lenders for projects that involve a high degree of risk.  The use of a construction interest reserve can help to reduce the risk of default by the borrower and ensure that the lender is repaid for its investment.

When calculating the interest reserve for commercial construction loan financing, the lender will take into account the loan amount, the interest rate, and the expected length of the construction period. The interest reserve is designed to cover the interest payments on the loan during the construction period, and it is typically calculated as a percentage of the loan amount. For example, if the loan amount is $100,000 and the interest rate is 5%, the interest reserve would be $5,000.

The expected length of the construction period will also play a role in determining the size of the interest reserve.  Also an astute commercial mortgage broker will estimate the average outstanding balance, so in this example if the estimate is a 50% average outstanding balance, the interest reserve would be $2,500.  In general, the longer the construction period is expected to last, the larger the interest reserve will be. By taking these factors into account, lenders can ensure that they have adequate funds to cover theirinterest payments during construction.