These are basically equity based loans where the lender is making a lending decision based on the equity in the project and the strength of the exit strategy at project’s end.
For commercial construction loans above $5,000,000, private sources are going to be hard to locate unless they are in the form of a mortgage investment corp that is large enough to deal with this type of transaction.
The key benefits to having a private lender fund a commercial construction project include the speed of getting the funding in place and the high predictability in the draw advance schedule.
And even though private money for construction can be fairly straightforward for most projects, there are some basic lending parameters that you should have knowledge of before settling in on this type of financing.
First of all, a private lender will look at financing between 65% and 70% of the market value of the completed project.
This may or may not related to 65% to 70% of the cost of complete the project as a third party property appraisal may be higher or lower than the cost to complete.
Assuming that market value and cost to complete will be the same can end up leaving you with a cash flow gap.
If this does occur, there are basically two ways to remedy the situation in still get the project funded.
The most obvious solution would be to inject more equity. If that is not possible, then the next most logical solution is provide additional real estate property as security so that the lender can provide leverage against it as well.
Its also important to understand that the lender’s loan to value requirement will likely need to be in place at all stages of the project. So if you have acquired a property for 10% of the project cost, and the lender will provide 70% of the project financing, its likely that you will have to complete the total investment of equity into the project before the first draw advance will take place.
This can vary from lender to lender and needs to be fully understood before starting a project with a defined third party debt financing source.
The key here is not to assume anything, especially when you are starting a project with your own funds and have not yet tried to secure a construction loan.
If your project does not align with these basic lending parameters, then there is a good chance commercial construction financing may be difficult to come by which could significantly jeopardize the investment you’ve already made in the project.
If you have a commercial construction project that you are planning, or one that you are in the middle of, and what to better understand your private mortgage financing options, I suggest that you give me a call so we can go over your situation together.