What are Construction Loans?
Construction loans are used to finance the construction of new commercial real estate developments. Lenders usually enter the project lifecycle when the development is “permit ready”, and there is no longer any entitlement risk.
Historically, banks provided the vast majority of construction loans, but recently there have been a host of new entrants into the construction lending market, primarily private funds that aim to fill the gap (i) when bank lenders are at capacity in terms of construction loan allocation, or (ii) at leverage points above where traditional banks will lend.
Advantages of Construction Loans for Borrowers:
• Utilize debt financing to build a proposed development
• Leverage the imputed land value of entitled and permit-ready sites
• Typically refinanced at stabilization with a long-term fixed rate permanent loan
What to consider when using Construction Loans:
• Best practice is to start surveying construction lender candidates 90 days prior to when expect to be “permit ready”
• Consider if the lender has experience in your property type and submarket
• Be sure to check if the proposed construction loan timeline allows for some “cushion” for unforeseen delays