Starting a Large Real Estate Project? Consider Using Construction Loans
When starting a large real estate project, you need capital, usually in the form of loans. Construction loans provide short term financing during the building and lease up phases while managing both soft and hard costs associated with the project. Interest on the loan is only applicable during the building and lease up phases, and any unspent principle reverts back to the lender without any additional interest owed. Mini-perm loans are often available in combination with a construction loan, which may also be to your greater advantage.
As with any loan, the process may appear rather daunting at first. However, understanding the process can open up a viable source of capital for you and your construction project.
The Process Summarized
When selecting a potential lender, you have a choice among financing companies and banks. Whichever you choose, the best fit lender would know the local market conditions well and should provide a wide scope of lending services to you. This is especially important since market conditions play a significant role in qualifying for a loan and should be as accurate as possible.
The typical process of successful construction loans goes as follows:
- The borrower submits a request for a construction loan to the lender of choice.
- The borrower may then receive a non-binding term sheet from the lender.
- Together, the borrower and lender negotiate the term sheet’s details.
- Underwriting begins. For commercial ventures, the borrower submits the cash flow projection, known as the real estate proforma, for the next ten years. Other risks are evaluated at this time, such as credit history, before the lender finally approves the loan.
- The borrower receives a commitment letter much like the initial term sheet, except the commitment letter is now considered binding with greater detail of the terms and conditions of the approved loan.
- Closing is an entire process, complete with a detailed checklist. Since closing is highly individualized based on the size of the project, market conditions, risks, proforma and lender’s policies, attorneys for both parties are directly involved.
- Depending on the terms and conditions, funds are available only partially at first. Then, the borrower submits draw requests at agreed-upon regular intervals.
What You Will Need
Construction loans protect funds for real estate projects throughout the building phase. You can improve your application’s success rate by choosing a knowledgeable lender as well as preparing the necessary documentation beforehand. Have your tax returns and financial statements in order along with cost estimates and specifications for your project at the ready. For the schedule of real estate owned and proforma, use templates and examples already available online.