There are a few types of commercial construction loans you should be familiar with. Let’s review.
Commercial development carries its risks and getting funding can be a little tricky. Typically, developers will need to come up with funding to buy the land and then use the land as full or partial collateral for the remaining funds needed. There’s often gaps in funding, unforeseen setbacks and then there’s the challenge of occupying or selling the building once the project is complete. From a few thousand bucks to a few million in funding, here’s some information on a few common commercial construction loans to help inform your next lending decision.
Mini Perm Loan
Commonly obtained through commercial banks, a mini-perm loan is temporary financing usually used to settle an outstanding commercial or construction property loan on a project that has potential income. If/when the project generates income for three to five years, the mini-perm loan is replaced with long-term financing.
Acquisition and Development Loan
A loan which allows the borrower to not only purchase raw land ready to be developed, but also install the necessary infrastructure (e.g., streets, utilities). Essentially, the loan covers the purchase of the land and any improvements necessary for commercial development. For the right property, it’s not uncommon for a local credit union or bank to bundle construction costs into an A&D loan.
Interim Construction Loan
A temporary loan (18-36 months) used to pay for the materials and labor used during a construction project. Sometimes called a self-build loan, construction loans are rarely offered online are usually obtained through local credit unions and regional banks. At a minimum, lenders usually require a 20 percent down payment but once the construction is completed—you can refinance into a permanent mortgage or get a new loan to pay off the construction loan.
Takeout loans aren’t so much construction loans as they are a type of long-term financing to replace short-term construction loans. With fixed, amortizing payments, many lenders require potential borrowers to secure a takeout loan before issuing a construction loan.