Whether it is to expand a space for your existing business or make an alternative investment, building a commercial property can be a great idea. For Arkansas investors, the total costs that come with planning and building a commercial building can seem daunting. Because of this, one of the best things that you could do would be to take out a commercial construction loan to help financing the development. It is important that you fully understand how commercial construction loans work before originating one.
Why Take Out a Commercial Construction Loan?
Taking out a commercial construction loan is a good idea for anyone that needs to build an new property. A commercial construction loan can be used to cover all aspects of the process. This can include paying for costs to acquire land, soft costs associated with creating plans and getting zoning approval, and all hard costs associated with the labor, materials, and development.
How Funding Works
When you receive a commercial construction loan, you will quickly find out that the loan works much differently than other real estate loans. With a traditional real estate loan, you will receive a loan that will be funded completely at close to purchase the property. With a commercial construction loan, you will only receive a portion of the loan up front. In most situations, you will receive some money to buy the land and reimburse other upfront costs.
After you start building the property, you can continue to draw on the commercial construction loan. Typically, on a monthly basis, you will send the lender receipts and evidence of payment for money that you spent on the property. The commercial construction loan provider will likely also send out an inspecting architect to confirm the progress that you are presenting. The lender will then have a few days to approve the draw, at which point they will fund more money off of the construction loan to you.
While a commercial construction loan comes with more work after the loan is funded, one key advantages is that you can save on interest charges. The lender will only charge interest on the money that has been actually borrowed. Additionally, you can receive an interest reserve that will be used to fund your interest payments each month.
When you are looking to take out a commercial construction loan there are a variety of expenses that you can incur. The first expense that you will have is a down payment. The lender will normally want you to have at least 20% equity in the project. Furthermore, the lender will want your money to go in first. This means that if it is a $10 million project, the lender will need to verify that you have spent $2 million up front before they fund any money.
Additionally, there are a lot of expenses that go along with a commercial construction loan. These loans will normally have higher interest rates due to the increased amount of risk. Further, commercial construction loans will have additional fees associated with the loan. This will include third party report fees, inspecting architect fees, loan origination fees, and a variety of other expenses that can add up quickly.
When you are taking out a commercial construction loan, the lender will also have many other expectations of you. Since constructing a building is a complicated process, they will do a lot of work to make sure that you are experienced in development and have a skilled team. This will likely include doing some work to verify the experience of the contractor and other professionals on your team.