Some “commercial construction funding” can be hard to get. Still, the idea of building a new business is exciting, whether it’s a hotel, restaurant, or some other type of leisure business.
We fully understand this problem here at HotelLaons.Net. We are skilled financial experts who can help you bring your construction dreams to life. We have an extensive network of capital partners and more than 30 years of experience underwriting hotel real estate. This means we can help you reach your goals.
The goal of this blog is to give you more information about how to get a commercial construction loan. That way, you can make smart decisions about your project. We’ll show you your loan options and help you understand how they vary.
Ultimately, we emphasize the importance of selecting the optimal financing and construction plan for your commercial property, enabling it to thrive and yield a long-term return on your investment.
Understanding the Landscape of Commercial Construction Funding
The Basics of Commercial Construction Loans
A commercial construction loan is a specialized type of loan that can be used to build new commercial properties or renovate existing ones in significant ways. Unlike a regular mortgage, these loans typically last for a short period, usually between 12 and 36 months, and are primarily used to build from scratch, make significant additions, or undertake extensive repairs. The “draw schedule” method, which gradually releases money over time, is an important part. Instead, the money is distributed in “draws,” or portions, as specific construction goals are met and verified by an inspector. This spread-out funding makes it safer for the lender and ensures that the funds are directly linked to the project’s progress.
The Loan-to-Cost (LTC) percentage is another crucial aspect of securing financing to build a house. This number shows how much the loan is compared to the whole project’s cost, which includes things like buying land, construction the house, and other “soft” costs. Lenders examine the Loan-to-Cost (LTC) ratio to determine the extent of financial leverage the project entails and the level of equity the borrower has invested. A smaller LTC typically means a safer investment.
Why Specialized Funding Matters for Hospitality Real Estate
Some hospitality businesses, such as hotels, motels, and restaurants, often struggle to secure funding. Other commercial real estate deals don’t work out like this. Usually, these are complex commercial construction projects with diverse operational needs, fluctuating market conditions, and higher operational risk compared to a typical office construction. Location, brand association, management team experience, and projected occupancy rates are among the factors that influence the success of a hospitality project. All of these factors need to be carefully considered during the insurance process.
Right now is precisely the time when having detailed information is very helpful. We at HotelLaons.Net understand how to handle these challenging situations as we work with a diverse range of hotels, including vacation and relaxation spots. Because we specialize in hotel assets, we have a deep understanding of your project. We can also put you in touch with lenders who recognize their value and offer a promise.
Key Commercial Construction Funding Options to Consider
Traditional Commercial Construction Loans
Most new construction are financed with traditional commercial construction loans, which are available at most banks and credit unions. People often choose these loans because the interest rates are usually lower, and the loan terms can be longer once the construction phase is complete and the loan becomes permanent financing. On the other hand, these good terms usually come with a stricter selection process. Borrowers typically need to demonstrate a strong credit history, a comprehensive business plan, and substantial funding for the project.
Making a significant down payment, normally 20–30% or more of the total project cost, is what this means. Additionally, obtaining approval can be a lengthy process because the lender must conduct extensive research on the client, the project, and the market. Traditional loans offer competitive rates, but you must be financially stable and have a clear understanding of the project’s objectives from the outset.
Government-Backed Loan Programs
There are several advantages to government-backed loan programs for specific commercial construction projects, particularly for small businesses and those located in underserved areas.
- SBA Loans (SBA 7(a) and SBA 504): These loan programs from the Small Business Administration (SBA) are ideal for small business owners who need funding for commercial construction. The SBA 7(a) loan is highly flexible and can be used for various purposes, including construction, operating capital, and purchasing equipment. The SBA 504 loan is designed to help businesses purchase or construct fixed assets. It combines the benefits of a bank loan with a smaller, fixed-rate loan from a Certified Development Company (CDC). Both programs offer benefits such as lower down payments (often as little as 10% for 504 loans), longer repayment terms (up to 25 years for real estate loans), and interest rate caps. These make it easier for approved small businesses to get than traditional bank loans.
- USDA B&I Loans: The Business and Industry (B&I) loan program of the U.S. Department of Agriculture (USDA) plays a crucial role in supporting the economic growth of rural areas. These loans can be used for a variety of commercial construction projects in rural areas that qualify, such as hotels and other lodging facilities. In line with the USDA’s goal to improve the quality of life and economic prosperity in rural America, it offers reasonable terms, making it much easier for developers to build in areas with fewer people.
- FHA Commercial Property Investment Loans / FHA Construction-to-Permanent Loans: The Federal Housing Administration (FHA) offers programs that can be particularly beneficial for certain types of commercial properties, especially those serving low-income communities or featuring a residential component. These programs are not standard for general commercial properties. FHA construction-to-permanent loans are designed to cover both the construction phase and the long-term mortgage that follows. This makes the process easier and provides you with fixed-rate terms after the construction is complete. These can be especially helpful for certain types of hospitality commercial properties, such as senior living facilities or developments that focus on community engagement in a specific way.
Alternative Funding Solutions
For projects that may not fit traditional lending criteria or require faster execution, several alternative funding solutions are available:
- Bridge Loans: Bridge loans are short-term loans designed to “bridge” the gap in funding. They are typically purchased quickly to meet the immediate needs of a construction project. At the same time, stable financing is being secured so that a house can be renovated before it is sold or refinanced. Bridge loans are flexible and can be closed quickly. Still, they typically have higher interest rates than standard loans because they are considered riskier and have shorter terms.
- Hard Money Loans: Hard money loans are a type of asset-based lending, which means that the loan is backed by the property’s value rather than the borrower’s trustworthiness. Because of this, they appeal to people who need fast cash or have poor credit. They are quicker and have less stringent credit standards. Still, the interest rates are significantly higher, and the terms are usually very short (6 to 24 months). For quick situations where time is of the essence, such as fix-and-flip or fix-and-hold strategies and urgent construction project funding, hard money loans are the best option.
- DSCR Loans: Debt Service Coverage Ratio (DSCR) loans evaluate a property’s ability to generate sufficient funds to repay the loan. Lenders consider the property’s expected cash flow more than the borrower’s income or credit history to determine whether to approve the loan. This makes them an excellent choice for investors who want to purchase business or hospitality properties that can generate income, as the property itself demonstrates its ability to repay the loan.
- No-Doc Loans & Lite-Doc Loans: The names of these loan options suggest that they require less paperwork than regular loans. Light-doc loans need some financial paperwork, but not a lot. No-doc loans don’t need any papers at all. They’re suitable for experienced investors with a proven track record of success who may have complex financial structures that make standard paperwork difficult to manage or who simply want an easier way to apply.
- Stated Income Loans: Because the borrower “states” their income, the lender proves it with less thorough checks than with traditional loans. This is a type of reduced-documentation loan. These can be particularly helpful for individuals who work for themselves or for businesses whose income fluctuates frequently. They usually have higher interest rates, though, to make up for the lack of proof.
Key Factors to Consider When Choosing Your Commercial Construction Funding
Project Type and Scope
The main things that determine the best funding choices for your commercial construction project are its type and size. When construction a hotel from scratch, for example, the financial needs and risks differ from those of renovating an existing restaurant or adding on to a motel. The type of job affects the loan amount required, the draw schedule, and the total timeframe. Additionally, the needs of different types of hospitality properties are also essential. A high-end resort may require a different approach to generating revenue compared to an extended-stay hotel, which is more cost-effective.
In the case of a commercial property, a “fix and rent” approach might favor loan terms that allow for a more extended stabilization period before full repayment. This makes some alternative financing options more appealing. The first step in finding the right funding options is to understand what makes your project special and what its goals are.
Financial Health and Creditworthiness
Your personal and commercial finances, as well as your creditworthiness, remain crucial when evaluating various commercial construction funding options. No matter what they do for a living, lenders will look at your ability to pay back the loan. This means checking both your personal and commercial credit scores, as a good credit history shows that you know how to handle money well. The amount of cash you have on hand and your debt-to-income ratio are also significant. The debt-to-income ratio compares your monthly debt payments to your gross monthly income.
However, even though alternative loans are more flexible when it comes to credit scores, you still need to be financially stable and be able to return the loan. Lenders will trust you more if you demonstrate a history of good financial habits.
Loan Terms, Interest Rates, and Fees
To figure out how much your commercial construction loan will really cost, you need to know a lot about the loan terms, interest rates, and fees that come with them. The length of the loan is referred to as its terms. Most of the time, shorter terms mean higher monthly payments but less interest paid over the life of the loan. On the other hand, loans with longer terms have lower monthly payments, but they charge more interest over time. Rates of interest can be set or change over time. With fixed rates, you can plan your payments in advance.
Variable rates, on the other hand, fluctuate based on market conditions, which may result in lower initial payments but greater uncertainty about future payments. Aside from the interest rate, it’s essential to research and carefully review all hidden fees. Some of these are origination fees, which are a lender’s cut of the loan amount; underwriting fees; assessment costs; legal fees; and inspection fees. If you don’t think about these things, the total cost of your business construction loan could go up by a lot. This can make an interest rate that seems reasonable less appealing in real life.
Loan-to-Cost (LTC) and Equity Contribution
The Loan-to-Cost (LTC) ratio is a crucial metric in commercial construction financing, as it indicates the proportion of the loan to the total project cost. Lenders use LTC to figure out how risky the loan is and how much equity you should put up as a borrower. Most of the time, lenders want a big down payment from the borrower. This shows that you’re serious about the project and lowers the lender’s risk. A larger down payment and higher ownership contribution from you will typically result in better loan terms and lower interest rates.
This is because it shows that you are financially stronger and less of a risk for the lender. It is essential to determine the amount of long-term capital (LTC) required and be prepared to invest equity to secure favorable commercial construction funding.
How HotelLaons.Net Can Guide Your Commercial Construction Funding Journey
Our Expertise in Underwriting and Network
We at HotelLaons.Net have been operating in the fast-paced hotel real estate market for over 30 years as an insurer. We can handle any request for commercial construction funding with the utmost expertise, as we possess extensive knowledge of the market, property valuation, and risk assessment. Our comprehensive and well-maintained network of over 200 real estate investors and private lenders significantly benefits our clients.
We can quickly match your project’s needs with the best financial partners thanks to our extensive network. This is true even for complicated or one-of-a-kind hotel businesses. We don’t just find lenders; we also make it easier to secure a loan by leveraging our contacts to secure better terms and faster funding. This saves you time and money in the long run.
Tailored Financial Consulting Services
People and companies interested in hospitality real estate can receive personalized financial advice from HotelLaons.Net to help them determine how to secure the necessary funding. We help our clients fully understand the range of loan options available to them, whether they want to purchase land for a new build, finance construction from the ground up, or utilize strategies such as fix-and-flip, fix-and-hold, or fix-and-rent for rental properties. Our personalized method ensures you understand the pros and cons of each financing option. You can then make decisions that align with both your project goals and your long-term financial objectives.
Exclusive and Non-Exclusive Referral Programs
HotelLaons.Net shares its knowledge with the brokerage community through fun suggestion programs. Brokers seeking to provide their clients with comprehensive solutions for commercial construction financing can gain a significant advantage by partnering with us. Our exclusive and non-exclusive recommendation programs enable traders to utilize our extensive network and expert knowledge without diverting their attention from their primary tasks. When brokers work with HotelLaons.Net, they can offer their clients secure access to various funding options and expert guidance. This will enhance their services, ultimately making their clients happier in the challenging real estate market.
Conclusion
It’s not just a step in the project to get the proper commercial construction funding; it’s a strategic choice that can make or break your success in the hospitality industry. As we mentioned, securing the right commercial construction loan is crucial if you want to make your dream a reality. There are various options, including standard bank loans, government-backed programs, and flexible alternative solutions. It is essential to determine which option best suits your project and budget.
In this complicated world, don’t go it alone. Contact HotelLaons.Net immediately to discuss your commercial real estate loan needs in more detail. We are committed to leveraging our expertise and extensive network to help you achieve your real estate objectives.
FAQs
How long does it typically take to get approved for a commercial construction loan?
The time it takes to get approved for a commercial construction loan can vary a lot. Due to the extensive research required, the approval process for traditional bank loans is typically longer. It can take anywhere from a few weeks to a few months. There is also a thorough study of loans backed by the government, such as SBA programs. Alternative ways to obtain money, such as bridge loans or hard money loans, can have significantly faster approval times. Depending on the project’s complexity and the lender’s needs, the timeframe can range from a few days to a couple of weeks.
Can I use a commercial construction loan to purchase the land and build on it?
Yes, commercial construction loans can often be used to cover both the construction costs and the land acquisition costs. When you apply, you’ll need to build the cost of buying the land into your total project budget. Lenders will use the land’s value to determine the loan-to-cost (LTC) ratio. The money for purchasing the land is usually given at the first closing or early in the draw schedule.
What happens if my construction project exceeds its budget or encounters delays?
Cost overruns and project delays are common occurrences in the construction industry. Lenders typically advise borrowers to plan for potential problems by setting aside a buffer fund (e.g., 10-15% of the total project cost) in their budget. Suppose unexpected costs arise that weren’t planned for. In that case, you may need to allocate more personal funds, secure additional financing (which could incur higher fees), or discuss with your lender the possibility of modifying the loan terms. Delays can affect when you repay your loan and the amount of interest you pay, so it’s essential to be honest with your provider.
Do I need to have a general contractor already lined up to get a commercial construction loan?
Yes, most commercial construction lenders will not provide a loan until you can demonstrate that you have found and been approved by a qualified and experienced general contractor (GC). The lender will review the GC’s insurance, training, track record, and ability to repay the loan. They want to know that the construction will be managed by a qualified professional, which will lower their risk.
What is the difference between a construction loan and a permanent loan for a commercial property?
A construction loan is a type of short-term financing used exclusively for construction a project. As construction progresses, funds are disbursed in draws, and borrowers typically only pay interest on the amount drawn at the time of disbursement. Typically, the construction loan is paid off with cash or, more often, converted into or refinanced with a permanent loan once the construction is stabilized (e.g., reaches a specific occupancy rate for an income-generating property). A permanent loan is similar to a standard mortgage for real estate; it’s a long-term loan that covers the full principal and interest over an extended period. Some lenders offer “construction-to-permanent” loans, which combine both parts of the loan process into one closing.
