As we discussed in an earlier posting, a newly renovated commercial property can earn more in rental yields as well as increase the value of your investment - a little construction sounds pretty tempting, doesn’t it? Or, maybe your business is doing so well that it’s outgrowing your current space. Or, perhaps you want to build a commercial property from the ground-up to customise it to fit your specific needs. There are many reasons why a business might need construction or development financing. But unless you have a secret coffer stuffed with cash, there are a few things you should know about these loans before you start ripping out walls or installing penthouse pools.
We’re not going to lie to you here, so the first thing you should know is that commercial development and renovation can be a very expensive proposition. It can also be a tough negotiation process with the banks that are risk repelled and regulation heavy.
There are experts in the industry who know how to tackle this daunting task, who can help you assess the feasibility of your plans from a foundation of development experience and in-depth knowledge of industry trends; professionals who understand market forecasts and use financial modelling tools to analyse project potential, and who have the experience of preparing and presenting proposals to lenders who are genuinely interested in backing your project. There are professional brokers who are not restricted by the limitations of Australia’s Big Four Banks, but rather have access to non-bank (Tier 2) and private loans as well. Contact Acumen Finance and speak to a specialist, or access our online Mortgage & Development Feasibility Calculator to play with the numbers yourself. Your aspirations might be just a click away.
What are Commercial Construction Loans?
As the name suggests, a commercial construction loan is used to finance the costs of constructing or renovating a commercial building. They can be used to purchase raw land and develop it from the ground up, to expand an existing facility and thereby it’s production capacity, or to add new life to a relic in need of up-scale resuscitation to attract high-quality tenants.
Get Ready...
When thinking of commercial construction loans, think big bucks - typically from hundreds-of-thousands of dollars to hundreds-of-millions. In today’s tighter lending climate, if you’re dealing with a bank, you’ll need to be uber prepared and organised, and it could take many weeks before you receive a bank approval, so patience is a must.
Here are some tips to help you prepare.
Draw!
Once approved, you do not get a lump sum of money. No, lenders are taking a risk with your development dreams, so they will closely monitor your progress and release funds only when certain milestones are met, and often, only after an inspection. For example, the draw schedule for a new construction loan (building from the ground up) might look something like this:
Depending on the amount of the loan and the scope of the project, the draw schedule may vary according to project-specific milestones. For example, if you’re renovating an old building, you’ll likely have an inspection for electrical and HVAC installation, but you wouldn’t have one for the foundation work, obviously.
As part of the bank’s efforts to reduce risk, they will want to see some, if not all of the following before releasing the next stage of funding:
Interest(ing) Twists
Construction loans are, typically, short-term (three to five years) interest-only loans until the full amount has been dispersed. The good news is that you will only be charged interest on the portion of the loan total that you have received.
Many lenders will let you capitalise the interest (4 to 12%) during construction, meaning that the interest is added to the amount you owe - but be forewarned, this is compounded monthly so you’ll pay interest on interest if you elect this route, and you cannot exceed your loan-to-cost ratio (loan divided by project cost), meaning the deferred interest cannot push your balance owed beyond the initial loan agreement.
Funding Options
As a Fintech facilitator bringing lenders and borrowers together, Acumen Finance has the resources to secure construction finance loans up to 100% of total costs. Our development finance rates start at a mere 4.5% per annum. We are experienced brokers who can help you with a low-doc loan, and we have a proven record of securing construction and development loans ranging from $400,000 to $100 million in a little as four days. We can provide you with a Conditional Letter of Offer in as little as 24 hours.
The commercial property climate across Australia is heating up and waits for no one. Are you ready to take the next step? Contact us today, and speak with a team of experienced land developers, certified public accountants and legal professionals at the ready to help you plan, prepare and connect with the construction funding for your project.