Builder Financing For Construction Projects

Builder financing can take the form of straight debt or lease. It can also be a one step or two step lending process with several variations depending on the builder’s financial position and project type.

Builder/Owner

One of the main builder financing scenarios for a small to medium sized business is the erection of a building for the business’s partial and total use.

Under this scenario, the business would secure debt financing by way of a mortgage on land and the proposed building.

Obviously for this to happen, the business or individual needs to own the underlying real estate and it needs to be zoned in accordance with the intended use, have an approved building permit, engineer drawings, detailed cost estimate, a contract with a reputable construction company, and be in compliance with any other lender requirements such as an acceptable third party environmental audit report.

The strength of the business from a profitability, credit, and net worth perspective will determine if the debt financing is a one step or two step process.

A one step process is when a lender is prepared to finance the actual construction process and roll all the costs into a long term commercial property mortgage.

A two step process is when one lender will finance the construction process and a second lender will pay out the first once the project is complete and take back a long term commercial mortgage.

The two step process is normally required in situations where the borrower cannot qualify for a one step lending scenario. For this reason, construction financing by itself tends to be higher risk and higher rate financing.

Builder financing as a whole, is viewed to be higher risk due to the uncertainties that come with a construction project. Will the project be completed? Will it be done on time? Will it be done on cost?

In order to address this issue, institutional lenders that like to finance completed projects, but not construction, will team up with private lender groups that provide the actual construction financing. At the completion of the project, the institutional lender will pay out the private lender group and place the total funds utilized into a long term mortgage to complete the two step builder financing process. By creating this two step package, the two lender groups eliminate the need for the borrower to find and coordinate the two different lending sources.

However, in many cases, that is exactly what the builder/owner must do. Once they are unable to secure one step financing, they will first seek out a construction only source and then find a longer term lender to come in after completion.

The challenge for the borrower is to find these collaborative lenders as they tend to work through networks more so than invest in retail advertising and promotion efforts to make these programs known.

Builder/Tenant

In cases where a business wants a new building for its own purposes, but does not want to outlay the capital to finance the construction or take on the related debt, the builder will work with an investment group that will provide builder financing to create an investment property.

Builder/Resale

In many cases, the builder is strictly building for immediate resale. In these situations, the builder is the short term owner of the property and has acquired all the necessary permits and compliance certificates to complete the project.

Again, the financing can be one step or two step, depending on the financial strength of the builder and the length of time expected before resale.

In situations where the project is effectively pre-sold, subject to the completion of the construction project, the builder may have more financing options, depending on the financial strength of the buyer involved.

Because of the speculative nature of resale, builder financing for the purpose of resale attracts private lenders that understand the specific building application and related market. Similar to any business financing application, the more variables at work in the risk model, the more specialized the lender, and the higher the lending rates.

Regardless of the specific builder financing application, the borrower will need to have an equity stake in the project for it to be viable to a lender. It is extremely rare to find a lender for a builder financing project that will finance greater than 80% of the estimated construction cost.

From Builder Financing To Home

GO HERE to contact me about Business Financing