You’ve got your designs. You’ve got your business plan. Now what? The following may not be a huge shocker: funding commercial construction isn’t always a breeze. If you’re asking yourself how to get financing started with some months to spare, you’re in a good place—as the process can take up to 3-4 months. Before your head starts spinning, here’s a few pointers to keep organized and simplify the process of obtaining a commercial construction loan.
Many would recommend working with a local bank, as they can perform diligent progress inspections without significant travel. However, local banks aren’t a “one size fits all” system. According to George Blackburne of loans.com, “Small banks (less than $1 billion in assets) make small commercial loans (less than $2 million). Regional banks ($1B to $10B in assets) make medium-sized loans ($2MM to $8 million). Money center banks (more than $10B in assets) make the commercial construction loans larger $8 million.”
Assemble Your Loan Package
First thing’s first, you must share with the lender information on the land acquisition and valuation. Along with this, you will need estimates of construction costs and sales projections to show you’ll be able to be diligent with repayment. In order to have a construction budget that will wholly encompass the project scope, a forward-thinking business owner will engage a construction manager and general contractor who understands the project type and its associated costs (experience with a similar opportunity is a good prerequisite). Early on, the owner should also engage with an architect, structural engineer and MEP engineers to develop ‘For Bid’ construction drawings. This will help your CM & GC develop a realistic budget and avoid/reduce additional costs as a result of plan revision during the permit drawing stage.
Gain a firm understanding of total costs and run the idea by several prospective banks (keeping names and specific location information confidential). If one banker is a no-go, another banker from the same organization may be a different story—oddly enough. Blackburne claims that he has “closed scores of loans in my time where Loan Officer A at Bank of the Neighborhood turned me down, but Loan Officer B at [the same bank] later said yes.” If at first you don’t succeed, pick yourself up and try again.
Once you accept a proposal from the bank, they will order an appraisal. This can be a bit time consuming (4-6 weeks), however once they provide the number, if it is at or above your estimated cost submitted, you’re golden. If the appraisal value is below your total projected budget, some revisions need to take place—delaying your project further. This why it’s smart to bring in an expert early to eliminate mistakes.
The final step is the title work. So that the bank can rest assured they’re the first secured creditor, this is a necessary link in the chain. After all these areas have been tackled, you’re set to sign the loan and begin construction activity.