When we are talking about construction of retail building, this could include plazas, strip malls, big box stores, mixed use properties, or stand alone retail outlets.
In the case of most retail building projects, there is going to be a defined exit strategy whereby after construction the property owner or developer will either be selling the property, occupying the property, or renting it out. For the last two possibilities, the property owner will be retaining the ownership of the property and will require a long term take out mortgage to repay the construction loan.
Having a well defined exit strategy prior to the start of construction is going to be most important to banks and institutional lenders and will be a requirement with many of them in order to entertain an application for retail building construction financing.
Private mortgage lenders that fund retail builds will still be interested in the exit strategy as it will identify how they will be paid out at the end of the project, but they may not require that a commitment to purchase the property or fund a take out mortgage need be in place prior to funding the construction loan advances.
Other than a well defined and established exit strategy, the lower cost bank financing will require an equity investment of the total project costs of 25% to 30% in most cases. Private lenders will require similar equity investments, but typically do not have as many other lending/funding criteria to meet as compared to a conventional lender.
So there is a cost/benefit trade off between bank versus private construction loans for retail projects.
With banks, the cost of financing is likely going to be lower, but the application process will also take more time and have more requirements. In addition, the draw advance agreement from a bank and result in draw reductions and delays as well, requiring the borrower to have another source of capital to draw on in the event of an advance issue.
Private lenders on the other hand are going to be more expensive for retail building construction loans, but they also tend to provide commitments to fund faster and the draw advance process is more predictable.
So there are pros and cons to each form of retail building construction loans and mortgages.
The key to construction financing success is having a good match between the borrower’s needs and what a chosen lender can deliver with respect to rates, loan costs, terms, and so on.
The best way to secure the right retail building construction financing for your project is to work directly with an experienced construction mortgage broker who can quickly assess your requirements and introduce you to relevant construction mortgage lenders that are capable of meeting your needs in the time you have to work with.