Are you purchasing raw land for commercial purposes? Do you want to build a retail center or office complex? Do you have a retail or commercial property that needs to be updated? At some point you’re probably going to have to borrow money to develop commercial property and when you do, there are many financing options to explore.

Real estate developers and investors who buy underutilized land or dilapidated properties have special financing needs, because they need to get these properties fixed and up to code rather quickly. Not only do developers and investors have to worry about selling, occupying or owning a property, but it’s important for them to set up financing to rehab the project and make it habitable. These are the reasons why Texas construction loans are quite common.

Starting the Process

The process of securing a commercial loan can be quite confusing and difficult to understand. The first thing a developer needs to do when seeking a loan for construction is to submit a request with a lender. A lot of construction lending comes through the form of community and regional banks. Historically, banking regulations and lending guidelines restricted certain trade areas for lending, however, things have changed. Today, it’s surprising to find some life insurance companies and specialty finance companies have started dabbling in construction loans.

There are normally two kinds of loans required to finance a real estate project and these include:

• Short-Term Financing: This stage of financing will pay for the construction and leasing phase of a project.
• Long-Term Permanent Financing: After a project has reached stabilization and leases up to the market level of occupancy, a construction loan may need to be taken out for longer financing terms.

Underwriting

After an initial loan application is received, a lender will typically send it on for a quick internal decision. If the project is approved, the lender will issue a term sheet which outlines the terms and conditions of the proposed loan. Once the non-binding term sheet information is reviewed, negotiated and accepted, the lender then submits the paperwork to the underwriting department.

During a loan’s underwriting process, the lender will evaluate the proposed construction budget, local market information, development team and financial capability of the borrowers. The typical paperwork required for underwriting include; the borrower’s tax returns, financial statements, documented information regarding real estate owned, contingent liabilities, construction loan sources/uses, cost estimate, full project plans, engineering specs and any other documentation requested to support the loan.

Once a Texas construction loan is approved, the lender will issue a binding contract letter to the borrower. The letter is very much like the term sheet, but contains much more detail about the terms of the loan. Additionally, a commitment letter is legally-binding, whereas a term sheet is not.

Closing

When a construction loan has gone through underwriting and been approved, then it moves onto the closing process. Commercial loan closings are complicated and require a lot of documentation. Typically, closing is handled by a lenders attorney, but it depends on where the money is being borrowed from. A loan closing checklist is also normally given to the borrower, along with a copy of the commitment letter, which outlines all the details of what needs to be done, before the loan can close and funds can be disbursed.

Commercial construction loans are complicated, but when you work with an alternative lender it doesn’t have to be. Through understanding the nuances of construction loans and how they work, it can help demystify the process for borrowers.