A Guide to Commercial Construction Loans

There may come a time when your business needs to expand. Perhaps you want to build your own office building or add to your existing space. Or, you may be starting a brand new business and you are ready to build from the ground up. Regardless of where your next steps lead you, the cost of expansion is normally very costly, with businesses commonly unable to afford to pay upfront. This may be the time for you to look into a commercial construction loan. At Wallis Bank, we want to help you understand the full picture of a commercial construction loan. 

What is a commercial construction loan?

A commercial construction loan is used to finance the cost of construction or renovation to a commercial property. This process can cost anywhere from hundreds of thousands of dollars to millions of dollars. In most cases, businesses can not cover these costs themselves. This loan covers a plethora of costs including the materials needed to build, labor costs, the purchase and development of land, or simply the renovations for an existing property. For business owners considering purchasing existing commercial property, a commercial mortgage may be an option for you. But, if you want to renovate a space you already have, or build from the ground up, you should consider applying for a commercial construction loan. 

Commercial construction loans are structured so that the borrower will work with the lender to create a draw schedule. This means that partial amounts of the loan are released as the project progresses and hits different milestones. For example, the first portion of the loan may be used for the development of land, while the next draw of money may be used to lay concrete and frame the building. This process continues until each milestone is completed. Keep in mind, lenders normally require an inspector to confirm that each step of the work is complete before another draw is made. 

With commercial construction loans, you are only required to pay interest on portions of the loan that have been received. For example, if new construction is going to cost $500,000, but you have only received $100,000 from your lender, you will only be required to pay interest on $100,000. Commercial construction loans are normally structured so that the borrower pays only the interest until the entire loan has been dispersed. Then, at the end of the project, the borrower can pay off the principal in one lump sum. The new property can serve as collateral, and then the borrower can use funds from the commercial mortgage to repay the commercial construction loan. 

What Interest Rates and Fees are associated with a commercial construction loan?

With commercial construction loans, borrowers should expect to pay interest rates between 4% and 12%. It is important to note that a borrower with good credit scores will receive lower interest rates. In addition, commercial construction loans from lenders tend to have lower interest rates in comparison to hard money lenders. When taking out a commercial construction loan, there are certain fees that may be applicable depending on the vendor you choose. These fees include: 

• Guarantee Fees 
• Processing Fees 
• Documentation Fees 
• Project review Fees 
• Fund control Fees 

Is a down payment required for commercial construction loans?

Commercial construction loans are considered a high-risk loan. Because of this, a down payment is required. Typical down payments are about 10% to 30% of the total projected costs. Please note that it is rare that a lender will fund 100% of the costs of a commercial construction project. Lenders tend to use a loan-to-cost calculator to determine what the down payment will be. 

At Wallis Bank, we take pride in providing loans that will help our customers succeed and accomplish their goals. Please contact us today for a one-on-one consultation. Learn more about our status as an SBA Preferred Lender.