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Commercial Construction Financing Explained
Manage episode 156136184 series 1177974
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The total costs on a commercial construction loan include:
- land acquisition
- hard costs
- soft costs
- contingency reserve (5% or less)
So, then what is the loan to cost? It is your total cost divided by the construction loan amount, which is then multiplied by 100.
For an example, let's say a developer in Miami wants to construct an office building. He needs $3.2 million loaned. His total costs are $3.8 million. When we divide 3.2 by 3.8 and multiply it by 100, we then get a cost ratio of 84. This is a little too high for industry standards, and most commercial lenders want to see a ratio of 80% or less because the developer has 20% equity in the project. This puts some skin in the game for them.
The best way to guide a developer to get to the total cost of 20% or more is to have the developer acquire the land. The developer should also have the architectural and engineering plans ready in order to get into a good equity situation.
We have seen people take loans with less than 20% equity, but it's not terribly common.
Here at CRE we specialize in commercial construction loans, and if you have any questions or concerns for us, please don't hesitate to contact us!
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