How The Commercial Construction Loan Process Works

Real estate development firms need to acquire commercial construction loans in order to develop a property. These types of firms purchase either an undeveloped property or one that has a structure on it that has come to the end of its useful life. These types of construction projects can cost a few hundred thousand to several hundred million for a huge project.

According to this almost all commercial construction loans are obtained from either a regional bank or credit union. This is because there has been regulation on banks that restrict in what physical areas they are allowed to lend money for these types of projects. Nowadays that regulation has been loosened somewhat and so national banks, insurance companies, and alternative asset finance companies are also getting involved in this area. However, most loans are still handled by credit unions and regional banks.

There are two loans involved when a company decides to develop a property, although these are often wrapped up in one loan. The first loan is for short term financing. This provides the money to get the structure built and then cover the time while the real estate development firm is filling it with leasees. The second loan product is for long term permanent financing. This is for the long haul while the structure is generating money from having leases.

The real estate development firm makes an initial loan request to get things rolling. Any commercial construction loans cincinnati oh almost always begins at one of that city’s credit unions or regional banks. The lender will either approve or disapprove the loan. If they approve it they will send a term sheet to the real estate development firm with the pertinent details such as the amount of the loan, the length, and the interest rate.

If the real estate development firm accepts the term sheet then the loan will get a complete underwriting review. The underwriter will review all of the details of the project and the finances of the firm asking for the loan. This usually includes the real estate development firm submitting a lot of paperwork such as cost estimates, engineering specs, financial statements, and so forth.

This article states that most of the commercial construction lenders will require the real estate development firm to put down at least 20 percent down. The lender will also require other things before approving the loan such as that a qualified architect and construction firm are doing the work. Home construction loans are easier to get approved than commercial developments as the regional bank or credit union knows their housing markets very well. This often makes them more comfortable to issue these types of loans.

Nowadays, another way to finance the building of a property is crowdfunding. Many small investors provide the money needed to build the property and then start collecting money once it is being leased out. Investors in the project might put down just $1,000 although in most cases the minimum to get in is in the five-figure range.