Many builders and developers dream of generating income through commercial construction projects. You can be a builder who wants to fix and flip an old commercial building because you see its potential. Or a developer wanting to start your very own subdivision or tract home project.
Or you can be a business owner who wants to build your commercial property from the ground up instead of continuing to rent.
While these ideas are indeed great, you may be discouraged because you lack the capital requirement. Understandably, most people cannot afford to spend hundreds of thousands or even millions of dollars at once.
Fortunately, commercial construction loans in Florida and Miami are available to turn your dream project into a reality.
In this article, you will find everything you need to know about commercial construction loans and how you can qualify for one.
Commercial construction loans can help business owners, builders, and developers in their construction and renovation projects.
A commercial construction loan is short-term financing for the specific purpose of building or renovating commercial real estate (CRE). The proceeds of this loan may be used to purchase the land where the structure is to be built and cover the labor, materials, and other associated costs for the project.
Compared to other CRE loans, construction financing carry higher risks because the real estate to be financed is not yet standing in the first place. To make up for these risks, construction loans often come with higher interest rates and shorter repayment periods.
A construction loan for a remodel is a specific type of commercial construction loan. Unlike a loan to purchase raw land or a horizontal or vertical construction loan, where the property doesn’t exist yet, a remodeling construction loan provides funds to do work on a property that already exists.
Remodeling construction loans provide funds to convert the structure or form of a building and change its use. For example, you may want to remodel your office building by converting the waiting area into a conference room.
Keep in mind there are also commercial construction loans available for other types of changes besides remodeling, such as a construction loan for renovations or rehabilitating, which we discuss further below.
A wide range of commercial properties qualify for commercial construction loan financing in the Miami & Florida region. These include:
Generally, SFRs, townhomes, and 2-4 units are considered residential real estate; thus, only tract home projects and new subdivisions qualify for commercial construction loans.
For example, a builder may want to build a whole neighborhood with multiple SFRs, or a developer may want to start a subdivision project with multiple townhomes inside its premises.
In these cases, the builder and the developer are qualified to apply for commercial construction financing.
If you intend to build a single SFR or a 2-4 unit property, you should apply for residential construction loans instead. As a start, here’s everything to know about home construction and renovation loans in Miami, Florida.
The occupancy types for commercial real estate construction financing fall under two categories – owner-occupied and investment. Depending on the lender, these occupancy types may limit your loan options when it comes to construction loans. You may encounter traditional lenders who only finance owner-occupied, while others may opt for investment properties alone.
For an easier and more convenient loan application process, creative lenders offer innovative construction loans with more flexible options and requirements that are available for both owner-occupied and investment commercial properties. This article will focus on these creative construction loan programs.
But first, let us define each occupancy type:
Owner-occupied, also called owner-user, refers to commercial properties that are used by the owners themselves for their businesses’ daily operations. For example, if you intend to build a warehouse that you will use for your own business activities, then your warehouse is considered owner-occupied.
On the other hand, properties that are rented out to third parties to generate monthly income is considered investment properties. These properties are not built to be occupied by the owners but as a form of investment. For example, you may build or renovate an office building and lease the office spaces to businesses in exchange for monthly rents. In this case, your office building’s occupancy type will fall under the investment category.
Whatever stage of construction you’re in, we can get you the funds you need.
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:
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:
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:
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 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:
The proceeds of this type of loan can be used in a wide range of activities, such as:
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.”
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.
Borrowers who wish to build multiple properties at a time can avail of development loans to pursue their projects without paying out of pocket.
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.”
Development loans are best suited for developers looking to build:
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 means to convert the structure or form of a building and change its use. Remodel construction loans can be used, for example, to:
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:
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:
With a construction loan to remodel, renovate, or rehabilitate, you can change your existing commercial property to maximise its income and usability.
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.
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:
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.
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.
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.
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.
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.
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.
Your draw schedule also dictates your monthly mortgage payments.
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.
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.
Here’s what to expect when it comes to commercial construction loan requirements.
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.
On the other hand, LTC is a relative comparison between the loan amount and the total cost of the construction.
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.
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.
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.
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.
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.
Even foreign nationals and other non-U.S. citizens can qualify for creative construction loans.
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 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.
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:
Based on these values, the lender can provide an offer that the property can cover in case the borrower defaults.
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.
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:
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.
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:
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.
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.
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.
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.
Let us take the guesswork out of the process.
Although construction loans are riskier than traditional mortgages, they can still be a good idea, especially if you lack the capital to get your commercial construction project started. Working with an experienced mortgage broker, you can find a commercial construction lender offering reasonable and fair terms.
Construction loans are repaid as interest-only during the loan. As construction progresses and the builder hits certain milestones, the construction lender disburses portions of your total loan amount in “draws.” You only pay interest on the amounts drawn. At the end of the term, you must pay the principal.
During the loan term, you only make interest payments, not principal payments. You make interest payments on a monthly basis based on the draws you’ve taken so far from the construction lender. Typically, the interest rate for construction loans is variable and fluctuates based on the prime rate.
