|Getting a commercial construction loan for different business entities can be an intimidating process. This post intends to shed some light on the basics of commercial construction loans to explain the lending process to our readers.
Commercial construction loans are loans advanced by a financial institution or a local bank to a business-entity that intends to construct a commercial property on a particular site. This loan is available for construction of commercial properties that includes apartments, office space, hotels, retail, and specialty industries. Commercial companies seek this loan for covering the costs of the land, construction, and business supplies.
Construction loan for commercial property is of two types— Short-term and Long-term.
A short-term construction loan is offered to companies until the construction work is complete, whereas a long-term construction loan is advanced to companies that want to initiate loan repayment after completion of the project. The combination of these two types of loans is called mini perm loan that assists in refinancing business-entities or creating an operating history.
Getting a commercial construction loan is a time-consuming process and hence, can be a daunting task. Here is a simplified elucidation of a construction loan for commercial property and its lending process.
Submit a Loan Application: The process of construction loan begins as soon as the lender receives a loan request from a developer. Your loan request is more likely to be approved if you include a guarantor in the project. Once the project gets the approval by the lender, a nonbinding agreement is issued to the developer outlining the basic terms and conditions of the proposed loan. This helps the prospective borrower to analyse if the terms complement his expectations.
The Underwriting Process: Once the term sheet is re-evaluated, negotiated and acknowledged, the proposed loan will go through the underwriting process where all the documents pertaining to the project will be evaluated along with the local market situation, details of the construction budget, the scope of the project, and the financial capacity of the guarantors. Besides this, the loan officer will also analyse the strength of the company’s market besides determining the risks pertaining to the loan request.
Documents for Underwriting Process: The process calls for several documents to support the loan request. This includes cost estimation, financial statements, details of the project, engineering specifications, guarantor’s or borrower’s tax return documents, and schedule of real estate owned.
Involve an Attorney: Since commercial construction loans are complex transactions, it is advisable to seek the assistance of a proficient attorney who can represent your interests in the process of loan transaction so as to help you identify and address all issues before the execution of the letter of intent.
Letter of Intent (LOI) and Loan Closing Checklist: As soon as the loan is approved, the lender issues a letter of intent to the borrower along with a loan closing checklist. The letter of intent is a legally binding agreement that includes the amount and term of the loan along with the proposed interest rate. The LOI is more detailed compared to the non-binding term sheet. The checklist describes the list of things that need to be completed to close the loan so that funding can be initiated.
Closing Process: Once the agreement is signed by both parties, the loan is funded by the loan administrator as per the bank’s procedures.
Though construction loan for commercial property is difficult to secure, understanding the underwriting process of construction loans, having an impressive financial record, and responding to your lender’s requests on time can help you obtain the construction finance in a smooth manner.