There are a few key differences between commercial new construction loans and investment real-estate loans. For starters, when we think of investment real-estate loans, we mean loans for existing commercial properties already built.
Commercial Construction Loans
There is vastly greater amount of complexity and knowledge required in a commercial new construction loan. There are so many more parts – some of which are needing a builder/developer, purchase of land, permits, full project plans, construction budget, local market needs for your particular project, etc. Fortunately you don’t have to be deeply knowledgeable about each part. However, you need to have enough familiarity. For example, you know little about architecture, but you find out the architectural plans will be inspected. Thus you have an indication they will be done right.
A commercial new construction loan generally has 2 loans involved. The first loan finances for the short term. This phase finances the new construction as well as the lease up phase. The second loan is for permanent financing. This phase covers after stabilization (the property is leased up to the level of occupancy of the market). This is longer term financing. An exception to needing two loans is the HUD multifamily construction loan which has one loan involved.
It’s Can Be A Long Process
There is a much greater amount of time from the start to the finish of a commercial construction loan. To get permits and meet all requirements before the start of building can take quite a few months. The construction phase could take most of a year or more. The lease-up generally requires months of time.
There is also a huge amount of documentation/paper work required for commercial construction loans compared to investment real-estate. You’ve got architectural, city permits, builder documentation, as well as more paper work required for the investor – just to mention a few.
There is quite a bit more risk involved with construction loan financing. Your first loan is based on pro forma, not actual historical numbers. There is the risk to the lender that the project will actually be completed. There is the risk of some unknown cost increases such as underestimating project cost or cost of construction materials going up. Since the construction phase of the loan is quite a few months, there is the increased risk of an adversely changing economy.
Having experience in investing in commercial new construction is more important than having experience in investment real-estate. This is because there is much more risk and many more parts. Lenders could require you to have experience. You may need a partner who has experience. And it certainly would be a good idea if you are not experienced in commercial new construction and financing.
In addition, you have a much bigger team of people working with you for commercial construction than for investment real-estate, which makes the loan more complex. There are different city people who require certain permits, processes, and documentation. There is the architect, builder/developer, subcontractors, workers, etc.
Investment Real Estate Loans
With investment real-estate, you typically need actual numbers to meet loan requirements. Your loan is typically dependent on historical data from income and expense. With a commercial new construction loan, you have no historical data from income and expense. You have a pro forma of projected expenses. This pro forma is done very carefully with much thought and supportive data in order that the loan is approved.
What Our Program Does
Here at the Commercial Loan Broker Institute, we believe in giving you all the tools and skills you need to becoming a successful broker. We understand how important it is for you to understand the important differences between two loan types. We spend time comprehensively training you on the different loan types thoroughly so you can understand the process and determine what financing is the perfect fit fit for your client.