And in situations where the property to be constructed will be retained long term by the property owner, an exit strategy will need to be put into place that is satisfactory for the construction lender.
If the constructed property is owned by a company or group of companies with established cash flow, then a standard take out mortgage will likely be arranged with a bank or institutional lender that is interested in the deal.
The construction lender may even require this future take out mortgage to be committed to by the lender prior to construction so that the construction lender has confidence in the borrower’s ability to qualify for a timely take out.
This would constitute two step or stage construction financing whereby in order to get the funds in place to complete construction, the long term financing must also be arranged as well.
But what if the company that requires the construction financing is not well established or cannot provide the historical debt servicing capacity that a bank or institutional lender will require?
In this case, the exit strategy for the construction lender will require a commitment from an equity lender that is prepared to pay out the construction lender based on providing financing against the completed project and potentially other properties offered as security, or cash investment, if there is not sufficient market value equity in the completed project to support an equity based loan.
The rationale here is that an equity based loan for one or two years can provide the operating company and/or holding company time to establish cash flow for debt service so that a long term commercial mortgage can be secured at the end of the commercial equity mortgage term.
And in this situation, the private lender or equity lender will also have to be comfortable with the future exit strategy as well as they will need to be paid out in one or two years once the lending term is over.
It will not be possible to get a commitment two years out that is of any real value, so the borrowers will have to provide a strong enough case and a strong enough security position to convince the equity lender that their exit will be in place.
So this essentially becomes three step financing where step two and step three have to be sorted out to some degree before the construction financing can be put into place.
In order to accomplish all of this the property owner/borrower needs to be committed to a multi year financing strategy that will allow exit strategy one and exit strategy two to be arranged on a timely basis.
If you require a multi step commercial construction financing strategy for either two step or three step financing, I suggest that you give me a call so we can go through your situation together and provide different financing options for your consideration.