Commercial Construction Loans & Financing

Commercial construction loans are a type of financing that helps businesses cover the costs of constructing a new building or renovating existing commercial properties. These loans are typically short-term and can be instrumental in boosting business growth.

Commercial construction financing is different from traditional commercial mortgages. Where a standard commercial mortgage provides funds for buying or refinancing an existing property, a commercial construction loan is specifically for projects that involve construction or significant renovations. They are a crucial financial tool for businesses looking to expand their operations, renovate their premises or build a new commercial property.

How Does a Commercial Loan Work in the Construction Industry?

A commercial construction loan operates on a draw system, with funds disbursed as construction milestones are met. This approach ensures that the project is progressing as planned and helps manage the risk for both the lender and the borrower.

When a business applies for a loan for construction of commercial buildings, it provides the lender with a detailed business plan, including the construction budget, project timeline, and expected income from the completed property. Once approved, the loan doesn’t get disbursed in a lump sum. Instead, the funds are released in stages or “draws” as the project hits specific milestones. This could be after the completion of the foundation, framing, or other significant construction stages.

Each draw requires an inspection to ensure the project is on track. This method of disbursement helps manage the lender’s risk and also ensures that the borrower isn’t overborrowing or misusing the funds. It’s important to note that during the construction period, the borrower typically pays only the interest on the drawn amount. The principal repayment starts once the construction is complete and the loan gets converted into a traditional commercial mortgage.

Advantages of Acquiring Commercial Construction Loans

The benefits of getting a commercial construction loan include:

• Flexible Payments: During the construction phase, borrowers usually only pay interest on the amount drawn, easing cash flow pressure during this phase.
• Access to Large Funds: Commercial construction loans can provide substantial funds necessary for large-scale construction projects.
• Project Oversight: Lenders often require regular inspections before releasing funds, ensuring the project remains on track and within budget.
• Conversion to Traditional Mortgage: Once the construction is complete, these loans typically convert into a regular mortgage, offering long-term financing.

Commercial Construction Loans: Costs and Interest Rates

Understanding commercial construction loan interest rates and costs can provide a clearer picture of the overall expense of this financing option.

Construction loan fees and fixed costs include:

• Origination Fee: This is a fee charged by the lender for processing a new loan. It’s typically a percentage of the total loan amount.
• Inspection Fee: Given that lenders require regular inspections before releasing funds, inspection fees may also apply.
• Documentation Fee: Lenders may charge a fee for handling and processing the paperwork associated with the loan.
• Prepayment Penalty: If the loan is paid off before the end of its term, the lender may charge a prepayment penalty.

Commercial construction loan rates are typically higher than those for traditional commercial mortgages due to the increased risk associated with construction projects. The exact rate will depend on a variety of factors, including the borrower’s creditworthiness, the construction project’s viability, and the overall economic climate.

Discover the Types of Commercial Construction Loans

Different types of commercial construction loans cater to various project needs. These loans are offered by different lenders, have different qualification criteria, and each has its own advantages and disadvantages.

What Types of Properties Are Eligible for a Commercial Construction Loan?

Commercial construction loans can be used for a variety of property types, including:

• Office Buildings: From single-tenant buildings to large office complexes.
• Retail Spaces: This could include shopping centers, storefronts, or malls.
• Hotels: Both new constructions and renovations of existing hotels can be financed.
• Industrial Facilities: Such as warehouses, factories, or distribution centers.
• Multi-family Housing Units: Such as apartment buildings and condominiums.
• Special Purpose Properties: These include gas stations, car washes, self-storage, and more. Note that these properties may have additional requirements due to their specialized nature.

While construction loans are available for different types of properties, many lenders will specialize in underwriting specific property types. That’s why it’s a good idea for business owners to apply through National Business Funding. The company submits applications to over 75 different lenders to get the best rates and the highest probability of approval.

Commercial Construction Loan: Application Process

Here’s a general outline of the steps involved in applying for a commercial construction loan:

• Preliminary Meeting: Discuss your project with the lender to understand the loan options and requirements.
• Loan Application: Complete the lender’s application form, providing information about your business, the project, and your financial situation.
• Documentation Submission: Provide necessary documents, including business and personal financial statements, business plan, project plan, and other documentation requested by the lender.
• Loan Underwriting: The lender will assess your application and documents to decide whether to approve your loan.
• Loan Approval and Agreement: If approved, you’ll receive a loan offer outlining the terms and conditions of the loan. Once the agreement is signed, the loan process moves forward.
• Loan Disbursement: The loan funds are disbursed according to the agreed-upon schedule, typically in draws as various stages of the construction project are completed.

This process can be long, and to get the best rates and highest chances of approval, business owners will need to apply with multiple lenders. To save time and simplify the process, business owners can apply with National Business Capital (NBC) instead. NBC will shop your loan request out to over 75 lenders to determine the best fit and get you the best rate on your financing.

Explore Alternative Options to Commercial Construction Loans

While a commercial construction loan may be the best financing solution for many businesses, there are other options for businesses that need less capital, more flexibility, or looser underwriting criteria. Some of these financing options also complement a commercial construction loan, helping smooth over any gaps between draws.