Commercial construction loans are a standard way to finance the construction of office, retail, industrial, multi-family, and other commercial properties. These loans are regularly used for new construction, additions, major renovations, and other large projects by a business. Most commercial construction loans cover the cost of land acquisition, materials, labor, and other expenses related to the construction process.
The structure of most commercial construction loans is fundamentally different from a typical mortgage, and even from many commercial real estate loans that are for developed properties. Some of the main features of a commercial construction loan include:
- Interest-only payments during construction. Lenders usually only require payment on the interest of a loan during the construction process. Investors generally don’t have to make monthly principal payments when their building isn’t yet useable. The lower payments help ensure investors can more easily stay current on their loan, even though they likely don’t have revenue coming in.
- Balloon payment structure. Because only interest is charged during construction, these loans commonly have a “balloon payment” meaning the full principal usually must be repaid when construction is completed, or at the time of the loan’s maturity. This is usually covered by transitioning to a commercial mortgage that covers the completed structure.
- Distribution of funds tied to milestones. Disbursements from a commercial construction loan are usually tied to specific milestones in the construction process. For example, the next disbursement might only be issued after the construction passes a specific inspection or a specific step is completed (e.g. the foundation is finished).
- Shorter term lengths. These loans are typically short-term loans, intended to last only for the duration of construction. They might have terms of a few months to a few years for larger projects.
- Variable rates. Like most commercial loans, commercial construction loans typically come with a variable interest rate that are subject to change throughout the length of the loan. This usually isn’t a major issue since these are short-term loans, though.
- Provide a large amount of capital. Having access to large amounts of funds is one of the major benefits of these loans, as many other commercial loans wouldn’t provide so much capital without a building.
Of course, commercial construction loans aren’t without risk. Major delays in construction can prevent the disbursement of additional funds, and potentially lead to a crunch when a loan reaches its terminal date. Another construction loan could be more expensive if the financing can’t be transitioned to a traditional real estate loan.
If you’re making an investment in a new building, or one that needs renovation, BankFive can help. Our dedicated commercial banking team can help you navigate if a commercial construction loan makes sense for you. Contact us today to discuss the right financing solutions.