Commercial Construction & Renovation Loans in Miami & Florida

Types of commercial construction loans in Miami & Florida

Constructing a commercial establishment is not a straightforward process. It involves several stages, all of which come with huge costs. Needless to say, construction projects can be very expensive – in their individual stages and as a whole.

There are three general stages involved. First is the acquisition of the raw land. In this stage, borrowers who do not have land yet search for a target parcel of land in their preferred area and pick the best option based on their specific requirements.

The second stage is the land development and horizontal construction. At this stage, the purchased or existing raw land is developed and prepared for the upcoming project. This involves initial site preparation, land grading, pipe laying, and more. During this stage, the developer, builder, or investor also completes the land entitlement process to secure the necessary building permits from the local government.

Vertical construction follows. This is the stage that most people are familiar with, wherein the vertical structures are built. This starts from the foundation of the building and up until the whole property is finished.

These stages are important because commercial construction loans are available for borrowers who are in any of these phases.

If you do not have a piece of land, this loan can help you buy one. If you already have one, your construction loan may only cover horizontal construction forward. You may apply for a construction loan before your vertical construction starts or even in the middle of it when the needs arise. Finally, if you already have a commercial establishment built but want to improve it to increase its value, a renovation loan is also available for you.

Here are the specific commercial real estate construction loans available for each stage:

Raw land commercial construction loans

Depending on the specific purpose of the construction project, borrowers may want to start with a loan for the construction of a commercial property from a completely undeveloped piece of land.

This option allows borrowers to:

• Save money by buying raw land.
• Pick the best location for their construction project, say an infill lot where they are easily accessible to their target market, or in a suburban area where the demand for subdivisions and housing are just flourishing.

Some lenders specialize in raw land loans to help borrowers purchase an ideal lot for their commercial construction projects.

However, since vacant land is yet to appreciate in value, these are risky loans for the lender to make. Thus, when applying for raw land financing, you may be asked to comply with additional requirements such as:

• Provide other properties to serve as cross-collateral;
• Provide evidence of the suitability of the land for development;
• Give a plan for entitlement; and
• Be eligible for the future developments to be financed by the lender.

As can be seen, raw land loans come with more requirements, but if approved, it would allow your business to thrive in its most ideal location or save you a significant amount by doing the land development yourself.

Horizontal development commercial construction loans in Florida

Horizontal development loans are given to borrowers who have their land secured but lack the budget for the next phases of construction.

Horizontal development loans are handy in these scenarios:

• If you are a developer who needs to act quickly and pay your target land in cash, you may take a cash-out refinance from your land to fund the next phases of your project.
• If you do not have an allotted budget for the project’s horizontal development, the proceeds can fill the gap, so the construction can proceed as planned.

The proceeds of this type of loan can be used in a wide range of activities, such as:

• obtain permits through land entitlements;
• installation of sewage;
• gas lines;
• electric lines;
• laying of concrete pads; and
• construction of roads around the premises.

Vertical commercial real estate construction loans

Vertical construction loans are what most people are familiar with.

These loans are used to finance everything that takes place after the horizontal construction is completed.

This includes the construction of vertical infrastructures such as SFRs, condominium complexes, apartment buildings, office buildings, and retail stores.

Unlike the first two types, the funds for the vertical construction are given as a series of payments in what are called “draws.”

• Each draw is disbursed to the builder or developer upon successful completion of the milestones specified in the draw schedule.
• Third-party inspectors visit the construction site to ensure that the project is going as planned.
• The draws and inspections help lenders mitigate the high risks associated with vertical construction projects.

Multiple-property construction loans in Miami or Florida

Sometimes, a commercial construction loan for a single property does not suffice, especially if you are a builder or contractor looking to build multiple properties at a time.

For such projects, development loans for multiple properties provide a better alternative.

These loans work just the same way as raw land, horizontal development, and vertical development loans, except that they are specifically given to builders or contractors building multiple SFRs (e.g., 2-5 properties), or 10 to 100s of properties in new subdivisions or tract home projects, for example.

Borrowers of these loans are given a line of credit called “builder’s line of credit” or “contractor’s line of credit.”

• Lenders pre-determine how much will be approved and given to each borrower, and from this line of credit, the builder or contractor draws the budget they need for their projects.
• One advantage that comes with development loans is the flexibility that it offers.
• The lenders do not closely monitor the draws and progress of the projects; thus, borrowers can easily draw money as the need arises.

Development loans are best suited for developers looking to build:

• 5 properties or more at a time;
• scattered lots; and
• infill projects.

Construction loans for renovations in Miami, FL

Not all commercial construction loans require building from scratch.  Some people need funds to change commercial real estate already standing.

While these loans are generally referred to as “construction loans for renovations,” there is no limit to the nature of the changes that you would like to maximize the value of your property.

For example, borrowers who want to change their existing commercial properties can apply for a construction loan for remodeling, renovating, or rehabilitating.

Remodeling

Remodeling means to convert the structure or form of a building and change its use.  Remodel construction loans can be used, for example, to:

• Gut, remove, or add walls to combine two rooms for an open plan
• Convert a storage area into a conference room  
• Convert a run-down motel into a multifamily apartment building

Renovating

Renovating means to make something about the property new or improved.  Unlike a remodel construction loan, where the use of the room is changed, a renovation loan does not entail changing the use.  Renovation examples include:

• Replacing old windows with new windows
• Upgrading an out-of-date office with new workstations
• Updating old bathroom fixtures in a multifamily apartment building 

Rehabilitating

Rehabilitating or “rehab” entails making an old building compatible for modern use while staying true to its historical or architectural features.  Commercial rehab loans allow you to:

• Updating the fixtures and workstations of an office building, but leaving the exposed brick walls intact
• Installing period-appropriate kitchen cabinets in a multifamily building and also putting in new appliances

Therefore, as you can see, these loans can finance all types of major value-add improvements of multifamily units, commercial spaces, office buildings, hotels, resorts, warehouses, and other hospitality and industrial buildings.

As a tip, keep in mind that traditional lenders typically have higher equity requirements.  You should find creative lenders who require lower equity and cash on hand. These lenders consider the value of the real estate after the improvements and not from its existing state, thus, leaving you with more funds for the project.

Commercial building construction loan for after project completion

After the construction is completed, borrowers are required to settle their balloon payment on the maturity date. To do so, some borrowers may sell their properties for profit and pay for the remaining commercial building construction loan. This option works for builders and developers involved in new subdivisions or tract home projects and investors who do fix-and-flip.

But for others who do not intend to sell their newly-built or newly-renovated commercial real estate, and do not have cash on hand as well, here are your financing options:

End loans

In a way, end loans can be viewed as regular commercial real estate loans because they are taken against the already existing commercial building.

These are long-term permanent loans with lower interest rates and better repayment terms. However, end loans can come with more stringent requirements, especially if you have a low credit score or low debt service coverage ratio (DSCR).

If you see yourself struggling to qualify for an end loan, you should consider DAK Mortgage’s creative commercial loans in Florida with flexible requirements.

These innovative loan programs provide alternative solutions for borrowers caught in all types of situations – be it lack of income documentation, non-U.S. citizenship, low credit scores, and more.

Note that borrowers are responsible for settling the balloon payment at the maturity date; thus, they must apply for an end loan early to ensure that they will not miss the payment date. 

Bridge loans

In case you experienced delays in your end loan application, with the maturity approaching and the loan approval not coming anytime soon, bridge loans can be a feasible alternative solution.

Bridge loans are short-term financing that can be used to cover the gap between the construction loan maturity date and the approval for a permanent loan. This type of loan is characterized by its quick closing, ensuring that you will not miss the deadline for your payment.

It is also a go-to solution for “broken construction loans”, where the loan becomes due while the construction is still ongoing.

However, bridge financing typically also come with higher interest rates than other loans. Thus, it is important for you to have a planned exit strategy prior to applying for this loan.

To maximize your offer, you should find creative lenders who underwrite your loan against the completed value of the property and not from its existing condition. This minimizes your equity requirements and will reduce the amount of cash you will need on the closing table.

Check out our guide on bridge loans in Miami or Florida and your mortgage options.

How do commercial construction loans work in Miami & Florida?

One common question we often hear is, “How do commercial construction loans work?”  The answer is not simple, as commercial construction loans are one of the most complex loan types.  Here is a brief overview of how commercial real estate construction loans work.

Commercial construction loan interest rates

In general, commercial construction loan interest rates are higher than other commercial real estate mortgages. This is because if the borrower defaults, the lender can only foreclose vacant land or a half-built commercial structure, which more likely won’t suffice to satisfy the outstanding mortgage debt.

This exposes the lender to a higher level of risk, which the lender mitigates through higher interest rates. Variable interest rates are also applied, which fluctuates together with the prime rate.

Timetable

A commercial construction loan is a short-term form of financing typically lasting from 1 to 3 years depending on the construction timetable submitted by the borrower during the loan application.

This timetable is prepared by the builder to provide lenders with enough information to properly evaluate the borrower’s request. Aside from the construction timeline, it also comes with a detailed plan and reasonable budgetary requirements, which are important considerations for the loan amount and draw schedules.

It is safe to assume that your loan period will be around the same timeline as your construction project.

For example, if your builder expects to finish your warehouse in one year, then you should expect to have your commercial construction loan lasting for the same period.

Draw schedule

Unlike other mortgages, the proceeds of construction loans are given as a series of payments and not as a lump sum.

So, after your loan application is approved, you should expect to work with the lender to come up with a draw schedule.

• This schedule contains information on when the funds will be disbursed to your builder and what milestones must be completed beforehand.
• It ensures that the construction project will go as planned, and the funds will be used entirely for the ongoing project.
• For example, a draw may be scheduled for release after the land area has been cleared. Another draw may be given after the foundations are laid, and so on.
• Lenders must make sure that these milestones are satisfactorily completed before they disburse the next payment.
• To do so, lenders send third-party inspectors to evaluate the progress of the project at different stages of the construction.

Your draw schedule also dictates your monthly mortgage payments.

• This is because construction loans are repaid as interest-only during the lifetime of the loan.
• The principal amount is dependent on how much funds have been drawn to date.
• Only after the project completion will you need to settle the balloon payment.

Repayment

Unlike residential construction loans, commercial properties are typically not eligible for a construction-to-permanent loan.

This means that borrowers should either pay the balloon payment on the maturity date or secure a second and permanent loan to refinance the commercial construction loan after the project completion.

As a short-term interest-only loan, borrowers should prepare their exit strategy even before maturity comes. This is especially true because they need another loan application and approval, which may take time.

What does a commercial construction loan cover?

Aside from the construction and renovation of your commercial building, the funds from the loan may also be used for other related costs. In general, it can be used to purchase the land where the building is to be built, to pay for the labor and the materials, as well as to cover other soft costs like engineering, architectural, and permit fees. Likewise, some lenders allow borrowers to use the money for fixtures and landscaping requirements.

Depending on your lender, you may also be required to set aside a contingency reserve. A contingency reserve is a percentage of your construction’s total costs and acts as a buffer in case upgrades, or changes are needed during construction. For example, your lender may ask you for 5% contingency funds computed based on your overall project cost, excluding the value of the land.

If you prefer to waive this requirement, you will need to submit documentation showing that you still have cash reserves of at least 10% after your settle the down payment. This ensures that the construction project will not run over budget midway.

Commercial construction loan requirements

Here’s what to expect when it comes to commercial construction loan requirements.

Loan amount

Lenders base your loan amount on the construction or renovation plans submitted during the application.

In general, a borrower may qualify for up to $50M or even more to finance the construction or renovation of their commercial buildings.

The minimum amount is typically set at $500,000, but consideration may be given on a case-by-case basis for a lower loan amount.

To obtain your loan amount, lenders consider two important ratios: (1) the loan-to-value (LTV) and (2) the loan-to-cost (LTC) ratio.

The LTV reflects the level of risks the lender is willing to accept in exchange for your loan.

• It is computed by dividing the loan amount by the expected market value of the commercial building once the construction is completed.
• Typically, lenders allow LTVs of 70% to 75%.

On the other hand, LTC is a relative comparison between the loan amount and the total cost of the construction.

• It is calculated by dividing the loan amount by the total construction costs.
• Lenders often allow an LTC of 85% to 90%.

Down payment

Like in any other loan, borrowers need to pay for the down payment at the closing table.

Lenders decide how much down payment must be shouldered by the borrower, and is based on several factors, including the lender, the loan program, the nature of the project, and your creditworthiness.

To make up for the associated risks, commercial construction loans typically require a higher down payment compared to other commercial financing options.

In general, you may be asked to pay up to 30% down payment, which can be lowered if you have a high credit score, for example.

Credit score

The risky nature of construction loans requires lenders to impose higher credit score limits compared to other commercial loans.

Thus, to qualify for construction financing, you may need to have a good personal credit score of around the 700s.

This requirement gives lenders additional assurance that the loan will be repaid, especially since the property being financed is not yet constructed or renovated.

Debt service coverage ratio (DSCR)

Also called the debt-coverage ratio, DSCR is a ratio used by lenders to assess the deal’s income potential compared to the expenses.

Essentially, the DSCR is a quick indicator of whether there is enough cash flow to “service” or pay for the associated expenses.

In the context of commercial construction loans, DSCR is a relevant factor for end loans or renovation loans, where the property is already existing.

Also, the lender will require you to provide a proforma, which is a statement that leverages hypothetical data or assumptions about future values to project performance over a period that has not occurred yet.

The higher the DSCR, the better the deal cash flows.

Generally speaking, DSCR is calculated by dividing income by expenses.

• For example, for a newly constructed multifamily property, DSCR would be calculated by dividing the property’s expected rental income (as projected by the proforma) by the property’s principal, interest, taxes, insurance, and association fees.

The exact calculation of DSCR depends on whether the subject property is occupied and used by the borrower themselves, or if the property will be leased out to others.

• For owner-user properties, DSCR is calculated by dividing the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) by the total debt service.
• On the other hand, for investment properties, the lender will perform a DSCR analysis only on the property itself. Specifically, DSCR is calculated by dividing the property’s net operating income (NOI) by the total debt service.

Some lenders require a minimum DSCR ranging from about 1.15 to 1.25. For example, a DSCR of 1.15 means that the property generates enough income to cover all of its monthly debt payments with a 15% excess.

More lenient lenders allow a minimum DSCR of 1.0 to give a chance to borrowers looking to finance newly constructed properties that are not expected to cash flow as well.

Citizenship

Citizenship is another limitation faced by borrowers who wish to build or renovate commercial properties in the U.S. Generally, traditional lenders only finance loans for U.S. citizens, leaving the non-U.S.-citizen requirements unmet.

Creative lenders aim to fill this gap by providing construction solutions that are available for foreign nationals and other non-U.S. citizens. You should explore your additional options to pick the best program for your specific situation.

Construction plan

Construction loans require you to submit a construction plan during your loan application.

This plan should be prepared by a licensed builder or general contractor and must contain detailed and realistic information on what you expect to achieve throughout the duration of the loan.

It should also reflect how you visualize the property should look once the development is completed.

For lenders, the construction plan serves as a walkthrough of the project, allowing them to visualize how the project will proceed once the funding is secured.

It makes them more confident about the project and the borrower’s ability to repay and thus, increases the odds of approval.

Appraisal

Like in any other real estate mortgage, the property to be built or renovated acts as the collateral for construction loans.

So, to ensure that the completed value of the commercial establishment will be enough to cover the loan, a third-party appraiser will provide the lender with two data points:

• the as-is value or the value before the construction or renovation, and
• the after-completion value or after-renovation value (ARV) which is the foreseen worth of the property after the construction or renovation is completed.

Based on these values, the lender can provide an offer that the property can cover in case the borrower defaults.

Recourse vs. non-recourse

When applying for commercial construction loans, you should also review the terms stating whether the loan is a recourse or non-recourse.

Under a recourse construction loan, the borrower signs a personal guarantee which makes them personally liable for the loan. This means that if you default, the lender can go after your personal assets to cover the remaining balance of the loan.

On the contrary, lenders of non-recourse loans can only foreclose and sell the collateral real estate to cover the remaining debt. They cannot go after your personal assets, which serves as additional protection to borrowers like yourself.

But even if you found your loan to be a non-recourse, you should still be careful.

Before signing your loan documents, keep an eye on “bad-boy” carve-out clauses that state that if the borrower is found to be involved in any form of negligence or fraud like delayed tax payments or submission of inaccurate financial statements, the non-recourse loan will automatically convert to a full-recourse loan.

Factors to consider for building, renovation & remodeling construction loans in Miami or Florida

Construction loans do not follow the same process and requirements as other mortgages. It is generally more tedious and time-consuming. You need to provide documents that are otherwise not needed for other types of loans.

As a start, here are the general factors to consider and requirements to prepare when applying for commercial construction loans:

A licensed and expert builder

Finding a licensed and expert builder is one of the most important factors when building a commercial property.

With the amount involved and the opportunities awaiting, you would not want to end up with a poorly built building, or worse, an unfinished one.

Like yourself, lenders also prefer to work with competent builders with an excellent track record. They give preference to projects involving professional and expert builders, as an additional guarantee that the construction will proceed satisfactorily.

To find your builder, you may start by collecting referrals from family members, friends, or colleagues who have built a property before. Their suggestions carry value because they have first-hand experience working with the builders themselves.

If you do not have luck with referrals, you can try searching for online directories of licensed builders and contractors. You can start, for example, with this list of construction companies in the U.S. The database provides complete contact information, website, and services.

After finding a builder or contractor that you think may fit your construction requirements, you should conduct company research as part of your due diligence.

You should compare all of your available options carefully, and pick the best builder that can give the most value for your project. You shouldn’t settle for less since you (or your buyer) will be using the constructed property for a long time.

Documentary requirements

Of course, you will need to submit several types of documents as part of your application.

These include the general requirements for any other mortgages, such as proof of income, tax returns, pay stubs, credit reports, bank statements, and rental history, if applicable.

Additionally, you need to prepare construction-specific requirements such as:

• contract with the builder;
• detailed project plan;
• detailed budgetary requirements;
• detailed timetable; and
• builder’s credentials, contact number, business permits, and insurance.

Completing these documents take time, especially if you do not have a licensed builder yet. So, it is always best to start ahead of time, than try to finish everything at the last minute.

Timeline

During your loan application, you will also be asked to provide a detailed timeline of your construction project.

This gives the lender an overview of the upcoming construction and helps them prepare your draw schedule.

Of course, your timeline should be as accurate and realistic as possible, accounting for all possible delays throughout the project duration.

It is understandable that you, as the borrower, may not have the foresight of what delays to expect, but your builder should have a considerably good idea.

For example, 2021 saw many commercial constructions being delayed due to the limited supply of raw materials.

• According to the report of the Commercial Real Estate Development Association, 86.6% of commercial property developers experienced delays and shortages in their construction projects during mid-2021.
• While this bottleneck is expected to improve in 2022, your builder should still reflect any delays associated with the supply limitations, as well as other possible delays.

Insurance

Getting insurance for a property that is not yet built may sound new to many borrowers, but it is important and common, especially in the eyes of lenders.

Traditional and creative lenders both require that you get insurance for your commercial property as early as possible to insure it against unexpected disasters such as fire, vandalism, theft, accidents, and more.

Use DAK Mortgage to get a construction or commercial renovation loan in Miami

Applying for construction, remodel & commercial renovation loans in Miami or Florida is more tedious and complicated than other commercial loans. You need to meet additional requirements and submit more documents that must be prepared with a licensed builder.

Adding to this burden is the significant differences among the construction programs and terms offered by each lender. As such, it is common for borrowers to get overwhelmed with all of the information, making the decision process even more difficult.

But remember that you do not have to work on the requirements and information alone. As a construction loan broker in Florida that’s been in the industry for years, we can help you sift through your options to find the best deal available. This way, you can focus on more important things, including the preparation for the construction or renovation of your property.