Your business has grown, and it might be time to move into your own building. You’ve looked at commercial real estate for sale or lease, but just haven’t found what you’re looking for. The location or size is wrong, its age requires costly remodeling, or some other feature excludes every property you’ve seen.
Should you build?
Learning about the process, securing a loan and other basic details might help you decide.
HOW DO I BEGIN THE PROCESS?
There are many ways to educate yourself about commercial construction loans, but the fastest path to a smart answer is a straight line to experts who deal with this every day. Obtaining their help to answer these three questions is where you begin.
1. Can you qualify for funding? Meet with a commercial banker to discuss financing. Traditional partners include a commercial builder, a commercial real estate agent, a real estate attorney and a banker. We suggest beginning with the banker to be sure you qualify for the necessary funding before you spend too much time pursuing construction or shopping for land. It gives you a solid understanding of payments you can afford, how much of cash you’ll need for the down payment, and other important financial details.
According to Propertymetrics.com (and a sentiment we agree with), “construction or development loans are almost always [financed by] local community or regional banks. Historically this was due to bank regulation that restricted trade areas for lending.”
Using a community bank also gives you access to a commercial banker with strong local relationships and a solid understanding of the local market. This can be incredibly helpful when selecting other construction partners. The banker often knows builders personally or by reputation, and can point you in the right direction with options you might not have considered.
The right banker can also help you with customized financing, since you won’t need just one loan. You’ll need to understand the kind of funding your cash flow can support, and obtain a package loan that includes short-term (mini-perm) funding to purchase land and fund building costs, then a long-term mortgage loan to pay it off at a lower interest rate. Other loans might be included in your package, which the banker will help you understand. It’s a complex process.
2. How long will it take? Put together a realistic timeline from funding through move in. Building from the ground up is a labor-intensive, LONG process. Not every business can afford to wait a year or longer to move in.
Sitting down to think through the process and how long a build takes from start-to-finish is sobering. Is waiting twelve or eighteen months a problem for business operations? Do you have that kind of time?
Talking this over over with your construction partners, along with the actual timeline of similar local projects, may be just the realization needed to make a decision that’s right for you.
3. Is land available in the location you prefer? Arizona is growing quickly, and its major cities are challenged with rapidly disappearing empty lots for sale. It’s harder and harder to find land that isn’t already occupied. Depending on budget, some are even bulldozing older buildings to make room for new construction in premier locations. Commercial builders have insight into available land, as do commercial real estate agents. Once you have discussed financing and are qualified to secure funding, it’s time to start looking at real estate options.
Figuring out if the right piece of property is available or not can swiftly guide your decision to build.
WHAT DOES THE UNDERWRITING PROCESS LOOK LIKE?
Funding for a commercial loan can differ based on the use of the building. If it’s an investment and you’ll be leasing space, terms are different than an owner-occupied loan. A banker considers the property’s ability to generate cash flow, instead of just overall cash flow for the business, and the investor’s experience and ability to manage the property. If the property is to be owner-occupied, a Small Business Administration (SBA) loan may also be considered.
For the sake of this article, let’s assume the loan is for an owner-occupied building. Before a banker begins helping you create a pro-forma document detailing the construction project, budget, market conditions, builder/contractor information, financials and credit history, they will discuss the purpose and goals of the project with you, and do a preliminary screening of your creditworthiness. From the preliminary information provided, the bank will decide if the proposed transaction meets its criteria for a qualified transaction. If the initial decision is to move forward, a term sheet is provided outlining details of the proposed loan.
Then the real work begins. The business owner will be asked to provide common financials, such as personal tax returns, profit and loss statements for the business, construction cost estimates and full project plans, and more. The banker will work with you to complete the process, which is extremely detailed.
Once loan underwriting is complete, the loan shifts into the closing process. It’s complex, with a vast amount of paperwork and processes required to protect the banker and borrower. Because the construction loan is funded in stages based on project completion, the borrower won’t receive a check and be on their way. Both the borrower and the developer will work closely with someone at the bank to follow bank policies and procedures in accordance with the loan terms.
TWO THINGS TO REMEMBER
Because of the time involved and how closely the relationships must work together, choosing the right combination of banker and builder is essential. You’re virtually married to them to them for years, in constant communication almost every single day. Their experience, skills and connections make all the difference
It’s also important to understand the time commitment commercial construction requires before you commit to the project. It’s not just about how many months it takes to complete, but how much of your time the project will require.
Business owners are busy and construction projects have a million and one details demanding attention. Sitting down to think through the process and how long a build takes from start-to-finish is sobering. It’s virtually a full-time job on its own. Do you have that kind of time? Can you afford the intangible “cost” of diverting attention from your business to the construction process? These are worth consideration.
If this isn’t something a borrower can manage, perhaps it’s better to purchase and retrofit an existing building, rather than building.
Commercial construction is an intimidating venture for beginners. If you have questions about funding, qualifications or the process, we’re here for you with a free, no-obligation consultation. Contact us today, we’re pleased to help. You can also reach out to us on our Facebook page.