Commercial Real Estate Construction

A commercial real estate construction project is just like other projects. You will have a start date, benchmarks to hit, and an end date. The end date is the property being complete and a certificate of occupancy is issued. Commercial Real Estate Construction loans differ from other loans.  A draw schedule is set up to disburse funds which translates to the loan being funded. These loans are also called interim construction, temp construction to permanent  loans.

Draw Schedule 

Draw schedule defines as the dates funds distribute.  Let’s review a few key points on construction lending. Construction Loans do not fund at closing.  This way the lender can oversee the process while minimizing the amount if interest paid by the borrower.  To be more accurate, the construction loan is pre-fund an interest reserve account. Money from this account makes monthly interest payments. Funds deposited are figured by the lender using loan amount, interest rate and time of estimated construction.  The benchmarks that exist are the catalysts so money disburses. Larger deals have more benchmarks and are more complicated. This also allows the lender to monitor progress of the commercial real estate construction loan. An inspector will come and inspect the work making sure the borrower is using the funds for the construction specified. 

 

Budget

A lender will set up a budget that the borrower sends the lender for construction. These are limits set to each line item the borrower submits in a budget. When the inspection is complete, a report is submitted to the lender. The report is in review with a construction loan administration department. If approved, a draw request is processes.  Draw funds deduct from each line item which releases to the borrower. This way the budget will update in the computer systems to reflect a current balance of each line item.  This process will take 2-10 days. It is always important for borrowers to know when they need to pay the contractors.  You should submit a draw request ahead of the time.

 

Construction Schedule Changes

Typically a construction of commercial real estate does not occur on plan. Delays from municipalities, weather etc always effect construction completion.  A Loan’s interest rate is pre-determined on the estimated time to completion.  When delays happen, the builder will may their own interest payment.  Or, they can ask the lender to move funds from one line item to another.  A lender can deny a change request. Usually, denying a change request is not in the best interest of the lender.  A project must be complete before a borrower can covert to a permanent loan.