How Do I Finance My Commercial Construction Project?

Do you have a project design, but need the financing to get it started?

Lacking the appropriate financial means, can delay your project.  Don’t be too quick on the draw, there is a process for everything including financing your commercial construction projection. Project financing involves soliciting a proposal from a financial institution, carefully reviewing the terms and conditions of that proposal, obtaining a satisfactory appraisal, ensuring clear title to the property and then closing on the loan.  This process can take 3-4 months so it’s best to start early.  Here are 5 simple steps to secure your construction loan.

STEP 1 – Project Specifications

Your bank will require the following information:

  • The location and associated land cost if applicable.
  • The budget including construction cost, equipment costs and soft costs (title work, legal fees, permits, municipal fees, insurance etc.)
  • A set of plans and specifications.

STEP 2 – Bank Proposal

The bank will then prepare a proposal for your review.

  • Most banks offer five year loans with twenty year amortization that require the owner to provide at least 20% of the equity required and the bank loaning the remaining 80% of the funds.
  • If you’re a start-up or existing small business, you may qualify for a SBA Loan (U.S. Small Business Administration).  Although, your bank must participate in the SBA program to participate. There are a number of guidelines for these loans.  If your firm qualifies, you may be able to reduce your equity to 10% while the bank increase theirs to 90%.  The federal government provides backing for these loans so they generally take longer to approve and include additional fees.  It is usually worth discussing this option with your banker to determine if it makes sense for your particular project.
  • Banks usually include loan covenants with their proposals. Typical items include debt service ratios that must be maintained, pre-payment penalties to encourage you to keep your loan with the bank and personal guarantees.  It is generally a good idea to review them with your attorney and CPA to ensure you fully understand what the bank is proposing and what your obligations are.

STEP 3 – Acceptance & Appraisal

Once you accept the proposal, the bank will order an appraisal.

  • Appraisals usually take four to six weeks to complete.
  • The bank can only loan based on the appraised value of your project so the appraisal is critically important to finalizing your agreement with them and signing the loan documents. If the appraisal comes in at or above the total project cost you continue moving toward closing.  If the appraisal comes in below your total project cost, you need to look at revising your request or providing more equity to make up the short fall.   If this occurs, review your options with the bank, your CPA and your attorney to determine if there is another option that makes financial sense.

STEP 4 – Title Work

The final step is the title work for the property.

  • The bank wants a clear title so they can be assured of being the first secured creditor.
  • If the title search identifies any issues, they will need to be resolved prior to closing.

STEP 5 – Closing

The final step is to close your loan.

  • Sign the loan.
  • Start Construction!!!


Next Steps

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