Commercial Construction Loans 101: Part 2

Let’s review underwriting in more detail and then get into the closing process.

 

Last time, we covered the basics of construction loans, the loan request, and gave an introduction to underwriting process. For a quick review, construction loans are generally short-term loans typically used to fund both the construction costs of a building and the interest. The process all begins when a loan request is submitted with a local lender. The local part is key, considering nearly all construction loans are granted from lenders who are intimately familiar with their local markets.


After a loan request is submitted, a quick check is performed to ensure the application meets initial criteria. If the project is accepted the request moves on to a senior lender will review and, most often, offer a term sheet, outlining the conditions of the proposed loan. Once terms have been negotiated and accepted, the lender will enter the full underwriting and approval process.

Underwriting

As we mentioned before, the underwriting process is an internal vetting procedure to evaluate the proposed project details, the budget, local market conditions, financial capacity of the borrower, and review any other risks inherent to the loan request. Lenders will look at tax returns, financial statements, cost estimates, project plans, engineering specifications, and much more. It can be an intense process since commercial construction loans have no operating history to underwrite.

 

Valuations are based purely on the projected cash flow of the property, or the real estate pro forma. If the loan is approved, the lender will draft a binding commitment letter. Similar to the terms sheet, but with much more detail, the commitment letter reviewed, negotiated, and accepted—and once signed acts as a legally-binding contract.

Closing

Usually, the closing is not handled by the borrower or the lender—but rather attorneys representing both parties. The length and involvement from both the lender and/or borrower purely depends on the size and complexity of the loan request. A loan closing checklist is typically given to the borrower which outlines items for completion before the loan can close and funding can begin.

 

About
Pyatt Broadmark Management is based in Seattle and offers private loans for real estate financing in Washington, Oregon and Idaho. Pyatt Broadmark Management has proven to be a valuable resource for builders, ‘fix and flip’ investment buyers and developers who require quick closings, “outside the box thinking” and the utmost professional service.
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