You have found a great commercial property for your next business venture, but it is going to need some renovations to get it into shape before the grand opening. You of course will need to finance the whole project from the purchase of the building to the construction costs to fix it up. Wouldn’t it be great if you didn't have to take out two separate loans in order to finance everything?
There is good news. There is a way to take out just one loan for both the cost of construction and the purchase price of the building. You can finance both the cost of renovations and the cost of the real estate purchase into a commercial construction loan.
Commercial construction loans are structured with an initial interest only period. During this time the borrower is only required to pay interest based on the amount of his construction loan that has actually been drawn out of the loan to pay for expenses. For example if the bank loans someone lets say $2 million for construction on a commercial property and the borrower draws out $75,000 to pay the first contractor at the end of the month the only payment due is the interest percentage on that $75,000. If the next month the borrower takes out $100,000 the payment would be the interest of the total sum borrowed so far against the loan. The borrower now pays the interest payment on $175,000.
This is typically how commercial construction loans are structured. At the end of the term for the construction loan the entire loan then either balloons or is rolled into some type of takeout loan where the borrower is now paying for the real estate mortgage and construction.
To obtain a commercial construction loan you cannot just walk in and ask for one you will need to bring something to the table to show you are not a huge risk. First you will need to add up all of the costs of the project. Those would be the purchase price of the real estate, closing costs if you have already taken out a loan on the property, hard renovation costs, tenant improvement costs, projected leasing commission if any, interest reserve for renovation and leasing period, soft costs of the renovation loan, and the contingency reserve.
Once you have found your total cost number the lender will want to see proof that the borrower has sufficient funds for a typical down payment. Usually a lender will finance 75 to 80% of the total cost and the borrower will need to provide proof that they have funds to cover the rest of the cost. Renovation loans structured like construction loans are far less risky than ground-up construction loans so there is a better chance of obtaining one.
For more information on purchasing commercial properties in North Dakota please browse our website or contact us at anytime.