Understanding Basic Commercial Construction Loan Requirements

  • October 6, 2022

Commercial construction loans are a crucial part of the process for anyone looking to develop commercial real estate. Without access to this funding, progress on a project can quickly grind to a halt. To secure a commercial construction loan, there are certain requirements that must be met by the borrower. 

This article will outline some of the key commercial construction loan requirements in the United States. Because these vary per provider, it is always prudent to consult with a loan specialist before beginning any application process.

What Do Commercial Construction Loans Cover?

A commercial construction loan is a type of financing that helps cover the costs associated with the construction of commercial buildings. This can include office buildings, retail spaces, warehouses, and more. The loan is typically used to finance the purchase of the land where the commercial building will be constructed, as well as the cost of materials and labor during the construction process.

Commercial construction loans usually have a term of 18 months to three years, with interest-only payments during construction and a balloon payment at the end of the loan term. They are often used for projects that are expected to generate income once completed, such as office buildings or retail space. Commercial construction loans are also effective for owner occupied commercial real estate properties. Business owners can lock in their occupancy costs so they won’t need to worry about being displaced by increasing rents.

Qualifying for a Commercial Construction Loan

As with any type of loan, there are certain requirements that must be met in order to qualify for a commercial construction loan. The specific requirements will differ from lender to lender, but some of the more common ones include:

  • A detailed business plan for the commercial building project
  • Evidence that the borrower has the financial resources to cover the costs of the project
  • A good credit score, typically 600 or higher
  • Personal financial statements
  • Tax returns for the borrower and their business
  • A detailed construction budget
  • Building plans and permits
  • A contract with a qualified commercial general contractor

Some lenders may also require that the borrower have equity in the project or a certain amount of money that they are required to put towards the project themselves.

Applying for a Commercial Construction Loan

The first step in applying for a commercial construction loan is to create a detailed plan for the project. This should include the total cost of the project, as well as a timeline for when each stage of construction will be completed. It is also important to have a clear understanding of the zoning regulations in the area where the commercial building will be constructed.

Once the plan is in place, the borrower can begin to gather the financial documents that will be required by the lender. This includes tax returns, personal financial statements, and business financial statements. The lender will also look at the borrower’s credit score, though this is not the end all be all. If a borrower has poor credit, they can still be considered if they have strong collateral to offer.

After this step, the borrower can begin to fill out a loan application. The application will ask for information about the borrower, their business, and the commercial building project. The lender will use this information to determine whether or not the borrower qualifies for the loan.

If the borrower is approved for the loan, they will then need to sign a contract with a commercial general contractor. This contractor will be responsible for overseeing the construction of the commercial building. The borrower will also need to obtain building permits from their local municipality.

When the contract is in place and the permits have been obtained, construction can begin on the commercial building. The borrower will make periodic payments to the lender during the construction process. Once the commercial building is completed, the loan will be paid off in full.

If you are planning to construct a commercial building, it is important to understand the requirements for a commercial construction loan. By meeting these guidelines and following the steps outlined above, you can increase your chances of being approved for a loan and getting your project off the ground.

Start Your Commercial Construction Loan Application With AVANA Capital

Need help finding the right commercial construction loan? AVANA Capital can help. We offer a wide range of loans to support your commercial construction projects, from short-term loans to long-term financing. We also offer competitive rates and flexible repayment terms, with down payments ranging from 10% to 30%.

AVANA Capital assists experienced entrepreneurs in developing commercial properties for the purposes of brand conversion, franchised territory expansion, ground-up construction, property expansion and renovation. Our lending specialists will be there every step of the way to ensure that large projects progress smoothly from start to finish. 

For more information on commercial construction loans and how AVANA Capital can help you finance your project, contact us today.