American Loan Guide

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.

Commercial Construction Loan

If you are looking for a commercial construction loan for a building or facility for your own company, you will not have an income producing property. Your commercial construction loan will be based on the merits of your business and the actual resale value of the commercial property you are about to construct.

Normally construction financing works in two stages.

The first stage is called and “acquisition and development loan” and provides funding for the purchase of the property. Mostly lenders like to lend 50% on land . If the land is ready for construction with approved plans as well as other improvements, lenders can go higher, but they usually like to stay close to 50%

The second stage is the “construction loan”, and the amount that you can borrow during the construction period is monitored via two values:

Loan-to-value: Two Things are looked at ”the value of the land as it is ” and “the value of the completed structure”. Normally, a person looks at a maximum of 75% loan-to-value for commercial construction.

Loan-to-cost: This is the maximum you can borrow as a function of the construction related expenses.

Obtaining commercial construction loans can be very daunting investor investing for the first time. Commercial construction loans are similar in many ways to private residential loans, but differ enough to warrant a thorough review of the process before proceeding for the first time.

If your commercial construction loan will be used to purchase or construct a commercial property that is already income producing, such as an apartment building, office or industrial building that is rented out, your commercial construction loan will be based on the current selling price (value) of the property and the viability of paying back the loan based on the income it will produce. Your commercial construction loan officer may also look at the use of funds.

As a rule of thumb, commercial construction loan officers use the 60/40 rule when determining the net income on a commercial property. Simply, 40% of the gross income is reasonably considered to be net income. The balance constitutes the net operating expenses. When applying for a commercial construction loan, it is best to use these figures or explain in detail to your commercial construction loan officer why your numbers are better or worse.

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