Commercial Construction Loans: Financing The Dream

By Tom G. Honeycutt


Raising money to establish a new commercial building or more complex development typically means dealing with large price tags and conducting substantial forecasting. And as with any real estate finance, it is a costly exercise due to the additional charges that are associated with it, besides the price of the property itself. Property transactions are usually longer term than any others in business, extending over several years or even decades. But where the building or other structure has not yet been built, there is more to the financing process than the mere sale. The commercial construction loans that are entered into in such instances are thus more elaborate than a simple sale agreement.

The most important use of a business property is the making of money. In light of this issue, the credit provider (typically a bank) is required to determine whether the property's income is going to be adequate to service the loan instalments or is germane to the amount of money lent. In turn, the lender also needs to be sure that the property's intended utilization is going to be able to secure that type of income.

Once the project's financial viability has been ascertained, the project management representatives and the bank (or other credit provider) need to negotiate the loan agreement's terms and itinerary. A construction loan usually has more than one stage, as the structure it finances comes into existence during the course of the agreement. The loan's first stage pays for the building process itself. Once that process is complete, and the structure is commercially employed, a much longer agreement commences which is used to cover the property's entire price. The bridging agreement between the two stages is called a mini-perm agreement.

In approving the agreement, the lender needs to assess the building contractor's history, capabilities and industry reputation. There also needs to be a verification of the contract price in relation to other similar projects, and this may require a detailed analysis of how the borrower or contractor intends to spend the available money.

It is impossible to inspect a non-existent building, so the borrower must also provide the lender with all the necessary technical details of the construction, such as the time frame, engineering information, quantity surveys and any other data affecting the credit assessment.

Banks and other institutions do not easily approve requests for money. People approaching them should therefore provide a detailed business plan, inclusive of solid market information. If the lender decides that the project is not suitable for the current market, they are not likely to approve the borrower's request.

The construction of a new building, shopping mall or other structure is always a source of excitement and adds to the economic growth of its home region. Finalizing the finance in a professional, successful manner eases the task of the project's management and saves time in terms of project commencement.




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