How Commercial Construction Loans Work

It might be difficult to obtain business construction financing for a range of commercial real estate projects. This post will explain how to get a commercial construction loan and provide some background information on the financing process.

Commercial Construction Loans and Lenders

The construction loan process begins when a developer submits a loan request to a lender. Construction and development loans are almost often taken out by local community and regional banks. This was formerly due to bank laws that restricted lending to specific trade areas. Life insurance firms, national banks, and other specialty finance institutions have recently begun to offer construction loans. Community and regional banks, on the other hand, continue to provide the majority of construction financing due to their superior knowledge of local market conditions and real estate developer reputations compared to larger out-of-area banks.

After the commercial construction loan is approved, the bank will provide a binding commitment letter to the borrower. The commitment letter resembles the term sheet, but it contains much more information on the loan's terms. Furthermore, the commitment letter, unlike the term sheet, is a legally binding contract.

Commercial Construction Loan Closing and Beyond

After a loan has completed underwriting and approval, which can take a long time, it moves on to the closing procedure. Commercial construction loan closings are sophisticated, requiring a lot of paperwork and procedural intricacies. The closing is usually handled by the lender's attorney, the borrower, and the borrower's attorney. The developer is frequently provided a loan closing checklist along with the commitment letter, which details what has to be done before the loan can close and funding can begin.

Business construction loans can quickly become complicated and difficult to get. Understanding how construction loans work and how lenders evaluate commercial properties, on the other hand, might help to de-mystify the financing process. We'll go over each phase of the process in greater detail in subsequent posts. Meanwhile, do let us know in the comments area below if you have any specific questions about commercial building financing.

Two loans are normally required to fund a real estate development project, but these two loans are sometimes combined into one:

Financing for a limited time. This stage of funding covers the project's development and lease-up phases.

Long-term, long-term funding. The construction loan is "taken out" by longer term financing after a project achieves "stabilisation" and rents up to market level of occupancy.

A construction and mini-perm loan is created when a bank combines the two types of loans into one. Mini-perm construction credit is a sort of construction credit that lasts for a shorter amount of time than traditional permanent financing. The mini-purpose perm's is to pay off the construction loan and establish a project's operational history before refinancing in the permanent market.

Commercial Construction Loan Underwriting

The bank normally conducts a quick internal go/no-go decision after receiving the original loan request. If the project is approved by the bank's senior lender, the lender may issue a term sheet explaining the proposed loan's terms and conditions, provided that all information provided is accurate and fair. When the non-binding term sheet has been inspected, negotiated, and accepted, the lender will proceed with comprehensive underwriting and approval of the proposed loan.