Board Topic: Commercial construction loan
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Commercial construction loan

Posted by: Not 2 sure Sep 24 2004, 04:01 PM
I am helping a friend to research out purchasing a lot space (12k sq.ft) to bulid a daycare. I don't have all of the nuts and bolts only that he has been in business with current daycare for 3-5 years so financial docs and W-2 are available. However, when I began searching finance options for the lot space, I was told by a lender that a bank is likely to request 50% LTV and or if this person has never developed anything he would have to have a business partner or someone who has developed a business from the ground up, which I don't think is going to be feasible at this time-
Are there any solutions to finance options for my friend the dollar figure around $1mil?

Posted by: loanuniverse Sep 24 2004, 07:31 PM
Normally construction financing works in two stages.

The first stage is called and “acquisition and development loan” and provides funding for the purchase of the property. The lender in the bank is right, the most that lenders like to lend on land is 50%. If the land is ready for construction with approved plans as well as other improvements, lenders can go higher, but they usually like to stay close to 50%

The second stage is the “construction loan”, and the amount that you can borrow during the construction period via monitored draws is a function of two values:

Loan-to-value: Two numbers are looked at ”the value of the land as is” and “the value of the completed structure”. Normally, you are looking at a maximum 75% loan-to-value for commercial construction.

Loan-to-cost: This is the maximum you can borrow as a function of the construction related expenses.

You did not provide information as to how much money your friend has available, but from the only figure that you provided {$1 million}, I think that a safe bet would be that he needs about $250,000 to pull this off. Also the person that he needs is not one “who has developed a business”, he needs a commercial real estate developer or a good general contractor. After all, he is already a businessman.

Frankly, I do not see this as being much of a possibility unless he has that kind of equity. The thing with construction financing at this level is that you will almost surely need to go to a bank. My take is that none of the non-bank lenders here will take the risk of going into construction without similar cushions so you might as well go to a bank.


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