Vermont New Construction Loans
Business owners face all sorts of complexities when managing their enterprises. Many issues of contention present a proverbial “silver lining” of positive sentiments. For example, a growing Vermont business may need a larger office or complex to conduct operations. An entrepreneur may find he/she outgrew working as an independent contractor and wants to launch a new business. Real estate construction projects may be at the core of these two scenarios.
Regardless of the business owners situation, real estate construction usually occurs after financing is procured. A commercial construction loan provides the funding for such projects.
Commercial Construction Loans Explained
As the name suggests, a commercial construction loan could finance the building of new property for business purposes. The name, however, isn’t wholly accurate. The loan may fund the renovation of an existing property. Or, the loan could develop property on purchased land. The linchpin among all the loan endeavors is the word “commercial.” The construction, building, or renovation project must focus on real estate intended for business purposes.
Business owners and other entrepreneurs see opportunity in a commercial construction loan. Paying cash to finance a multi-million dollar project could prove unfeasible if not impossible. Approval on a commercial construction loan in Vermont now swings doors open for the entrepreneur to move forward.
The Unique Structure of Commercial Construction Loans
Commercial construction loans follow the basic principle all loans revolve around: a lender gives the borrower money, and the borrower pays the loan back per the established terms. Constructions loans do differ from traditional loans in one significant way. The loan isn’t issued in a lump sum. Instead, the borrower and lender agree on a “draw schedule.”
The draws represent installments in which the lender releases funds to the borrower. Since construction projects take both time and money, the lender establishes milestones necessary for the release of the next round of funds. Construction projects can run into difficulties. So, the lender protects itself by not extending too much money at one time to a potentially troubled project. Credible inspectors check on the projects to make sure a milestone has been reached.
Borrowers appreciate the fact interest they only pay interest on the released amount of the funds. This way, if the project stalls, the borrower doesn’t pay interest on the money he/she never received.
Shifting to a Commercial Mortgage
Once the construction project reaches completion, the borrower has to pay the loan off. The borrower isn’t locked into paying the obligation off out of his/her personal funds. Upon completion, the borrower has the option of seeking a commercial mortgage. If approved for a commercial mortgage, the mortgage funds may pay off the debt on the construction loan. Now, the borrower now deals with a much longer terms and more agreeable interest rates. Of course, the borrower must be approved for a commercial mortgage. Approval isn’t always guaranteed as commercial mortgage lenders consider many things.
Costs associated with a commercial construction loan in Vermont and elsewhere may seem high. The high-risk nature of commercial lending drives up costs and fees. The down payment amount, for example, may be as much as 30%. Interest rates could reach upwards of 12%. Since credit score factors into the interest rate amount, a borrower could receive a far lower figure on the loan.
Due to the nature of a commercial construction loan, various fees come with the contract. Processing fees are standard as are guarantee fees. Other fees associated with these loans include fund control, project review, and documentation fees. Each lender has its costs. Borrowers should review the expected fees when looking for an appropriate lender.