Sometimes it can be difficult to find the right commercial property for your business needs. Not only can it take days, if not weeks, of tireless property viewings to find what you’re looking for, but buying an existing piece of property can also get quite expensive. Construction loans are a great alternative for businesses who would rather build their own commercial property from the ground up.
Construction loans are a fairly standard product offered by banks and other lenders to assist with the construction of a new residential or commercial building. While it’s important to know that you have options at most major banks for construction financing, it’s usually smarter to stick with smaller community banks since they tend to have a better grasp of the local real estate market, which could positively impact the terms of your loan.
When it comes to considering different types of construction loans for your commercial property needs, there are two major questions to ask yourself. Do you expect the need for financing to end once the project is successfully completed? Or will you need to finance the loan for a period of time afterwards?
Short term financing is a great option if you plan to repay the loan shortly after construction finishes when the property is ready for business. This usually ensures that the overall cost of financing remains minimal. That said, it can be tough to repay a construction loan right off the bat.
Long term permanent financing is another option for borrowers who would rather finance the construction loan after the project finishes and repay it over time. In this case, your loan is essentially refinanced into a lean that is placed on the property following construction—usually with better terms such as a fixed interest rate and amortization schedule.
Another option to consider is a combination of short term financing and long term financing. Also known as a “mini-perm” loan, this option gives savvy borrowers the flexibility of holding out for a better permanent loan following the completion of construction. This happens by creating a temporary bridge loan instead of immediately rolling it over into permanent financing. This might be a great solution when interest rates for commercial property financing are high, but be careful not to wait too long before transitioning to a more permanent loan.
Construction loans can range from being simple to rather complex—remember to fully investigate your options before moving forward. A quick review of your own business needs is a great way to get started on the right track.