Today we're going to be speaking about commercial construction financing. There are two very important terms we'll be speaking about: loan to cost and total cost. The total costs on a commercial construction loan include:
land acquisition
hard costs
soft costs
contingency reserve (5% or less)
So, then what is the loan to cost? It is your total cost divided by the construction loan amount, which is then multiplied by 100.
For an example, let's say a developer in Miami wants to construct an office building. He needs $3.2 million loaned. His total costs are $3.8 million. When we divide 3.2 by 3.8 and multiply it by 100, we then get a cost ratio of 84. This is a little too high for industry standards, and most commercial lenders want to see a ratio of 80% or less because the developer has 20% equity in the project. This puts some skin in the game for them.
The best way to guide a developer to get to the total cost of 20% or more is to have the developer acquire the land. The developer should also have the architectural and engineering plans ready in order to get into a good equity situation.
We have seen people take loans with less than 20% equity, but it's not terribly common.
Here at CRE we specialize in commercial construction loans, and if you have any questions or concerns for us, please don't hesitate to contact us!
Today, I want to briefly discuss innovative solutions outside of the bankable box. Here at CRE Finance, we examine transactions on a case-by-case basis. Our financing technicians have years of experience that allow them to structure and customize financial solutions just for you. Today, I want to share 10 special situations we come across:
1. Complex company structures.As we all know in commercial real estate, company structures can be complex, from individual owners to family trusts and more, we are here to help get through those complex structures.
2. Businesses outside the United States. Cheaper wages and better tax structures have taken many businesses outside of the United States; whatever it might be, CRE Finance can make things happen regardless of where you're located. 3. Concentration risk and foreign customer risk. United States real estate is red hot, especially in big cities like Manhattan and San Francisco. There is a lot of foreign currency coming through the states, but a lot of companies can't lend in them. CRE Finance can. 4. Ratio of inventory to accounts receivable are upside down. All companies have different accounts receivable -- some are profitable, some are upside down, some are seasonal, and some are year long. CRE can audit your accounts receivable and tailor lending that will help your company. 5. Specialized enterprises and criticized industries. Restaurants and bars are industries that are harder to finance, have more liability, and are somewhat criticized in the press. That doesn't stop us -- give us a call and we'll tailor a loan to your specific needs.
6. Pre-revenue businesses lack of historical performance. Some companies are startups and some entrepreneurs may have diverse business backgrounds. We would love to help people in those situations. 7. Constraints from an existing financing structure. A lot of existing structures, a lot of mortgages, that were done in the mid- to late-2000s may have various complexities that could come up. Here at CRE, we would like to help you with those. 8. Absence of a personal guarantee. Many business owners nowadays would like to have what they call a non-recourse loan, which means there is no recourse to the owner, no personal guarantee. Sometimes this is possible, but not always; we could look at the structure and advise you if we'd be able to tailor a loan to not have a personal guarantee. 9. Distressed and work out situations. Over the years, we've seen many work out situations on borrowers who have had distressed real estate. We are experts in this field. 10. When time is of the essence. In real estate and in business, when is time not of the essence? We at CRE Finance understand that your business and your real estate are important and we are here to help.
Many people are unaware that they are bankable. Many people let their real estate or business go before even trying. We want to make sure that doesn't happen to you! Give us a call or shoot us an email at any time. We would love to hear from you!
In the past, we talked about how to package a personal construction loan, and we've recently received a bunch of questions about it that we want to answer today.
One of the most important things is putting together your loan package. To do this, you need the answers to the following questions:
What was the price when they acquired the land?
Is the land worth more now than when they acquired it?
Do they have a performer showing what current and future income will be?
Is it a rent scenario? Or are they going to be selling as townhomes and condos?
You must know how to put the package together correctly so it is looked at and underwritten correctly. We at CRE Finance are here to help loan brokers and mortgage brokers do just that. You need to get a non-circumvent agreement and we can give you one that you can use!
We could go on forever about this topic - packaging a personal construction loan can be a big money maker for everyone involved. Give us a call or shoot us an email if you would like our help. Let's get some loans closed here in the last quarter of the year!
