Looking for commercial construction loans? Building a commercial real estate project typically requires a huge amount of capital and extended construction services. Only some enterprises have the capital readily available to fund a project themselves. Getting a commercial real estate loan and understanding how it works is crucial for anyone in the commercial real estate business.

Fortunately, understanding how these loans work and how to choose the best type of loan for your project is relatively easy if you have the right team of professionals working with you.

What Is a Commercial Construction Loan?

A commercial construction loan is a business loan used to finance the construction or renovation of a commercial real estate property. A company needs more funds to pay for such a project with cash, as opposed to more flexible home construction. Therefore, a loan of this type is used in almost every commercial real estate construction project

Commercial construction loans typically require detailed construction plans in underwriting, so before a loan happens, a construction management company will need to consult to complete formal plans. Prospective property managers also look for these types of loans before renovating their real estate.

How to Apply for a Commercial Construction Loan

Applying for a commercial construction loan is slightly different from applying for a loan to build a home. The bank will require more paperwork than a typical personal loan application. 

To qualify for a real estate construction loan, the borrower must establish their creditworthiness. If a business is new and does not have an established credit history, the loan may be secured using the business owner’s credit. 

The bank will require at least two years of business and personal tax records, business profit, and loss statements, and detailed construction plans showing cost and time-to-completion estimates. 

Similar to a personal mortgage loan, the bank wants to be reasonably sure that the business will be able to make the monthly payments on the mortgage for the term of the loan. The more qualified the buyer or buyers are, the more favorable the loan terms will be.  

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Types of Commercial Construction Loans

Several types of commercial construction loans are available, each with a specific purpose. Banks that offer commercial loans typically require a downpayment of at least 10%, although it is often higher and depends on the underwriting completed by the bank. Most loans have a 25-year term and may come with fixed or variable rates. On variable-rate loans, the rate is usually fixed for the first few years and may adjust later if the rate declines or rises. 

The Small Business Administration is a common source of financial assistance for construction management. Often, the down payments are less, and they will also have competitive interest rates.

CDC/504 Loans

One popular loan from the SBA is the CDC/504 loan. Loan amounts may be up to $5 million and have a term of 10 or 20 years with interest based on the U.S. Treasury rates. The down payment is between 10% and 30%, with the property held as collateral. The business owner or owners must personally guarantee the loan, regardless of business creditworthiness.  

The funding comes from an SBA-certified development company for 40% of the project’s costs. Another lender must be accountable for 50% of the costs, with the borrower making at least a 10% downpayment.

SBA 7(a) Loans

The SBA 7(a) loan stands as a cornerstone for financing in the realm of commercial real estate construction, offering a cap of up to $5 million and terms of repayment extending to 25 years. The interest rate for this type of loan typically aligns with the prime rate plus an additional 2.75%. Applicants can expect down payment requirements to range between 10% and 20%, with significant consideration given to the borrower’s credit score during the evaluation process.

Expanding upon the basics, SBA 7(a) loans are particularly suited for a variety of commercial construction scenarios. This includes the construction of new buildings, renovation of existing structures, or the expansion of current facilities. Small businesses looking to purchase land or property for commercial use also find this loan option appealing due to its flexible terms and relatively low interest rates. Furthermore, businesses aiming to refinance existing commercial real estate debts for better rates or terms might consider the SBA 7(a) loan a viable pathway.

Given the SBA’s mission to support small business growth, these loans are ideal for small to medium-sized businesses demonstrating solid business plans and potential for growth. Entrepreneurs aiming to break ground on new commercial ventures or tangibly expand operations may find the SBA 7(a) loan to be a fitting financial foundation to support their projects.

How Commercial Construction Loans Work

Most commercial construction loans are structured slightly differently than many other loans. Most loans are funded entirely on the loan closing day, or they are structured as a line of credit in which the borrower can withdraw any amount at any time up to the credit limit. 

Construction loans usually have a draw schedule based on detailed plans and a schedule submitted while underwriting the loan. 

Usually, the construction project’s entire cost is due to the builder in stages, and the draw schedule uses that timeline. As the project progresses, more loan gets funded to pay for the construction. 

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Commercial Real Estate Loans in This High-Interest Rate Environment

Interest rates have increased significantly throughout the year. While inflation may be peaking, interest rates will likely continue to rise, at least into the early part of 2023. 

So, does it make sense to take on a construction loan when interest rates are so high?

The best way to make that decision is to put everything in the proper context. While interest rates are indeed higher than they were a year ago, we don’t consider them high by historical standards. 

Rates had been held artificially low during the pandemic to keep the economy running during that unprecedented period. Rates have risen to the historical average. They are not high, nor do any expert economists expect that they will rise much further. 

Key Takeaways

Above all, when looking at commercial real estate, rents tend to rise faster than interest rates in times like these. While high interest rates do add to the cost of purchasing and building commercial real estate, the increase in rents tends to more than make up for the extra costs. Periods of higher interest rates have proven to be the most profitable times to invest in commercial real estate.

  • Commercial construction loans exist to construct or renovate commercial buildings or other real estate projects. 
  • Underwriting may require both personal and business credits, tax records, profit and loss statements, and construction plans with a schedule. 
  • Loans typically require a 20% down payment and have a loan term of 25 years, although that can vary with bank requirements and creditworthiness.
  • The SBA has programs to help finance contrition loans up to $5 million
  • Rents tend to outpace borrowing costs during periods of rising interest rates.

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About NAI Glickman Kovago & Jacobs

As the leading commercial construction in MA, NAI Glickman Kovago & Jacobs focuses on commercial property management in Worcester County. We have an award-winning restaurantretailofficeindustrialmultifamily, and medical real estate management record.

We can also assist with land acquisition and development as a commercial brokerage. Our deep local knowledge comes from decades of business partnerships with commercial contractors and key community vendors. Whether buying, selling, or leasing, we can find the right commercial investment property to fit your needs.

Contact us today if you need help finding central MA building and construction, brokeragecommercial construction management, or local property management services in Worcester, MA. You can also follow us on FacebookInstagram, and LinkedIn for more updates about our commercial retail space listings.