Having a growing and expanding business is a positive thing—and likely welcomed by any company owner. However, it is also probable that as your business grows and your revenues increase, you could be faced with some challenges when it comes to space.
It could be a situation where you are renting office space, and it is more financially beneficial to build your own commercial building. Or, perhaps your company has outgrown your property and you want to add on to your existing space. Still yet, maybe you are a start-up, but you want to construct your property from the ground up to ensure your growth plans don’t hit a proverbial wall in too short of time.
Regardless of the circumstances, it is common for businesses to contemplate real estate construction or improvements as part of expansion efforts. At the same time, many businesses cannot afford to pay high costs for construction completely out of pocket. Therefore, it could be time to consider a commercial construction loan.
In this blog, the commercial construction loan professionals at Filmore Capital will explain all you need to know about this type of loan, so you know what to expect.
What Is a Commercial Construction Loan?
Simply put, it’s a type of loan that is used to finance costs associated with commercial building construction or renovation. The funds of a commercial construction loan can be used to cover the expenses associated with materials and labor for the construction of a new property as well as the renovation of existing properties. This type of loan can also be used in the purchase and development of land for a new commercial property.
How Does a Commercial Construction Loan Work?
Vastly different from other loans, most commercial construction loans are structured so that the borrower does not receive the full amount of the loan upfront. Rather the borrower will partner with the lender to devise a draw schedule. For instance, when the construction project hits a certain milestone, partial amounts of the loan will be disbursed. Then, as each milestone is completed, the lender will usually require an inspector to confirm that the work was completed before releasing the next round of funds. This will continue on until all project phases have been completed and the loan funding has been 100% released.
Other Important Points
With a commercial construction loan, a borrower:
- Will only pay interest on the portion of the loan proceeds that have been released.
- Will usually only pay interest until the loan has been fully disbursed.
- Refinance the loan balance upon completion.
Ultimately, if, at the end of the project, the full loan is due, a borrower now can receive a commercial mortgage if the construction loan doesn’t automatically convert to a permanent loan. In this regard, the property itself will serve as collateral and the borrower will be able to use the funds associated with the commercial mortgage to pay back the construction loan.
Handling it this way will enable the borrower to make more affordable payments on a monthly basis over a longer period of time.
What to Expect with a Commercial Construction Loan
Here are some other key points to keep in mind regarding commercial construction loans:
- Borrowers should expect to pay interest rates between 4% and 8%.
- Borrowers who have the strongest financial wherewithal will be eligible to receive the lowest interest rates.
- Lender type matters: Banks have lower interest rates when compared with hard money lenders; however, eligibility standards will be more stringent with a bank.
- Several types of fees are usually associated with a commercial construction loan, and these vary by lender; some fees include guarantee fees, processing fees, documentation fees, project review fees, and fund control fees.
- A down payment 10% to 30% of the total project cost will be required and based upon property type and financial strength of the Borrower.
Filmore Capital Can Guide You
There are many commercial construction loan options, and many different lenders. Filmore Capital welcomes the opportunity to speak with you about your financial needs and identify the commercial construction loan product that is a best fit for your business.
We invite you to reach out and schedule a consultation today. Filmore Capital has the ability to help business owners negotiate the best loan terms without the hassle of engaging multiple lenders individually. Contact us now.