Commercial Construction Financing

Obtaining commercial construction financing for a major multi-million dollar project can be a lengthy and arduous process. But the financial aspects, usually a combination of investment funds and loans, make it possible for shoppers to enjoy giant malls, tenants to reside in comfortable apartment complexes, and employees to work in large office buildings. Few hospitals, educational facilities, convention centers, theme parks, or hotels could be built if there weren't processes in place for gathering together the millions of dollars it costs for developers to build these major projects. The planning process itself may begin years before the first shovel breaks the ground. The developer needs to acquire land and obtain all the necessary governmental permits. Architectural designs need to be created, evaluated, and selected. To get the project from an idea to a completed building takes the efforts, creativity, and hard work of many people. The commercial construction financing is a crucial element of the entire process.

Depending on the project, the developer may need to work with municipal and/or state governmental agencies to get the go-ahead on construction. Environmental concerns may need to be addressed. For example, some governments require wetland mitigation as part of the land acquisition process. This can be a complex endeavor that involves working closely with a state's environmental protection agency and, perhaps, hiring professional consultants. Local governments have an interest and a stake in the building of nonprofit projects such as hospitals and convention centers. Public meetings may need to be scheduled to get input from the local citizens before the project can be approved. These are just a few of the issues that need to be taken into consideration as a timeline for the project is created. The developer also needs to consider the economic impact of these kinds of issues when going through the commercial construction financing application process. A carefully crafted budget will take into account such costs as land acquisition, architectural design, construction materials, labor, and other expenses.

Jesus once asked his audience: "For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it? Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him, Saying, This man began to build, and was not able to finish" (Luke 14:28-30). A competent and conscientious developer doesn't want to be in that type of situation, either. A major construction project that remains unfinished is not only an eyesore; it's also an economic blight on a community. Developers have an obligation to "sit down and count the cost" before applying for commercial construction financing. Those who don't pay attention to the budgetary issues may not be in business for long.

Various lending institutions have different criteria for accepting a developer's loan application. However, almost every lender conducts the profit test the completed project needs to provide a profit for the developer. Lenders also look at certain ratios to determine eligibility. One of these ratios is the loan to value ratio. This means the amount of the loan as compared to the estimated value of the venture once it's completed. The common loan to value ratio is seventy-five percent. For example, if the estimated value is calculated at $100 million, the commercial construction financing lender will provide financing up to $75 million. Lenders may also look at the loan to cost ratio. This is a comparison of the loan amount to the cost of the venture. The most common loan to cost ratio ceiling is eighty-five percent, though some developers may be able to find some lending institutions willing to finance up to ninety percent of the project's cost. In addition, lenders may look at the developer's net worth and compare that to the requested loan amount.

If the amount approved by the lender is less than what is needed, the developer will need to seek additional commercial construction financing in the form of a mezzanine loan. This type of financing, designed for major projects, works similarly to a second mortgage on a personal residence. Instead of being secured by the actual building complex, however, the mezzanine loan is secured by stock in the company. If the loan goes into default, it's easier for the mezzanine lender to recoup losses with financing secured by stock instead of a physical asset such as a building. Those involved in mezzanine lending very seldom provide financing for less than $2 million. This type of financing option is reserved for especially large construction deals.

Of course, not all commercial construction financing is for giant projects. Some developers specialize in smaller ventures, such as a small office building or retail store. Others work with government programs and are financed, at least in part, with taxpayer dollars. For example, low income housing projects usually are a combination of both public and private funding. In addition to new construction, contractors also seek loans for major renovation and remodeling projects. Again, these may be financed solely through private means or, especially for buildings with some type of historic or community significance, through both private and public funding. The Small Business Administration, a federal agency, provides developers and contractors with preferred commercial construction financing lenders. The benefit of working with an SBA preferred lender is that the developer's loan application is processed efficiently and quickly. Obtaining construction financing is a long and arduous process, but a very necessary one if new hospitals, schools, offices, and apartment complexes are going to be built.