Commercial Construction Loans

2007-11-26 09:43:06

( Financial )



What are Commercial Construction Loans?

If you need money to finance the construction of a building, apartment complex, mini-mall or any other property where you expect to generate rental or sales income, you should apply for a commercial construction loan.

Also called commercial property loans or real estate financing, commercial construction loans may be acquired from financial lending companies.

Because of their large capital requirements and relatively high-risk nature, commercial construction loan applications have to undergo rigorous processes before getting approved by the lenders. Expectedly, the property you are constructing will be the main collateral of the loan, but the lenders may also request other types of collaterals and guarantees. Several lending institutions may also have to pool their funds together if the loan size is huge.

Credit Reviews

Just as they do for individual loan applicants, lenders have to make thorough checks of your personal credit history, as well as the credit records of your partners and co-owners. Your credit records will greatly affect the loan terms and conditions.

Lenders typical conduct several tests involving financial records of individuals or companies who are applying for commercial construction loans.

Profit Test

The lender predicts the future profit you will make if you sell the property after its completion, basing the figure on the expected revenues less any expenses such as realtor's commissions, taxes, amortizations, and closing costs. The lender also estimates the amount of time that you will be able to sell the property.

If the constructed property is to be rented out, the lender will be most concerned about whether the rental income will be sufficient to cover loan amortizations after all operating expenses have been deducted.

Loan-to-Value Ratio

The lender calculates this ratio by dividing the loan amount by the fair market value of the finished property and then multiplying the result by 100. Most lenders want the loan-to-value ratio to be 75% or lower.

Loan-to-Cost Ratio

This is derived by dividing the loan amount by the actual cost of constructing the building. Most lenders want the ratio to be at most 70%, but some may be willing to lend the funds even if the ratio is higher.

Debt Service Coverage

Lenders are also interested in your ability to service not just the commercial construction loan, but also your other liabilities. Your company and personal credit histories reveal all your outstanding debts as well as any adverse record such as late payments, foreclosures or bankruptcies. Lenders tie in your debt service ability with projections of future income, to see whether you will make enough profit to cover debts.

Applying for Commercial Construction Loans

You can either go personally to consult the commercial loans department of any financial institution. It is also advisable to seek advice from the bank where you keep your deposit accounts, as being an existing client may provide you more leeway and less hassle to get a loan. There are also various internet sites where you can try applying directly for commercial construction loans.


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