Commercial construction loans are typically arranged for specific phases of a construction project.
For instance, its not uncommon that a separate loan is required for each of land acquisition, site development, and the actual building construction.
Each stage of the project will likely increase the value of the overall project, providing a basis for future financing events.
But the main reason for requiring multiple types of commercial construction loans relates to the financing risk associated with each event with also impacts the cost of construction related financing.
Another way of looking at this is that there is no guarantee that a construction project will advance from phase to phase on a timely basis, or at all. So for each financing event, there is typically a short timeline to completion and a completion of value added work or at least clarity as to the value of the project once borrowed funds are invested.
For the lender that is prepared to extend funding for the land purchase, the lender is making a borrowing decision based on the current market value of the land and if development work does not proceed immediately or at all, the borrower has a clear view of the resale market for that project.
Same line of thought applies to someone providing land servicing and site development financing. Not only are they well versed in the draw management requirements of this type of funding, but also all the regulatory requirements that need to be in place prior to any work being done. And once the borrowed funds have been invested in the project, the market value will have increased and provide a broader range of exit strategies to the lender. But at that point of completion, there is still no guarantee to a lender that the building phase will progress any time soon or at all, so once again, financing tends to be arranged on a phasing of the work basis.
This also allows lenders to be extended into a project for a shorter period of time, and even if a lender is prepared to fund multiple phases, its not uncommon that the construction mortgage gets rewritten to pay out the existing debt and provide for the work required in the next stage with rates and terms associated with the risk of the next step.
The key point here is that the coordination of commercial construction loans among different phases of a project can be considerable and difficult to manage.
As a result, you would be well advised to be working with an experienced construction mortgage broker to not only source the funds when required, but to also set up a fully integrated financing strategy for the whole project so the builder, developer, or property owner can seamlessly move from one phase to the next without financing delays.
A construction mortgage broker is also invaluable during the construction project with helping both sides complete the borrower and lender requirements as well as being involved in the facilitation of solutions to any problems that may occur with the financing arranged and the related cash flow management.
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