Are you stuck on a commercial building project that is too big for regular financing? Your building project may need a hard money construction loan to get off the ground. These special loans are ideal for accelerating your commercial building goals since they provide quick approvals, flexible terms, and the freedom to take on even the most challenging projects.
Hard Money Commercial Construction Loans: Financing Your Vision, Faster
It can make all the difference in the fast-paced world of commercial real estate development to secure funds swiftly and take advantage of opportunities rather than letting them pass you by. Conventional bank loans for building projects in the commercial sector can include drawn-out approval procedures and stringent qualifying standards. Hard money building loans can help in this situation. They provide a quicker, more adaptable alternative financing option made especially for building projects in the business sector.
What are Hard Money Commercial Construction Loans?
Short-term bridging loans, known as hard money commercial construction loans, are provided by investment groups or individual lenders. In contrast to conventional bank loans, they place less weight on the borrower’s credit history and more attention on the value of the real estate itself, including the land and any future construction. This enables faster approvals—often in a matter of days or weeks—in contrast to the many months that conventional bank loans may require.
Hard money lenders
Short-term, asset-based loans are provided by hard money lenders, a specialized kind of lender. They give less weight to your credit history and more weight to the value of the asset you’re utilizing as security than traditional banks do. This makes them a viable choice for real estate investors with less-than-perfect credit who require funding urgently.
What they offer: Hard money lenders provide short-term loans, typically with a term of 6 to 18 months, to finance investment properties or commercial real estate. They base the loan amount on the after-repair value (ARV) of the property, which is the estimated value once any renovations are complete.
Who uses them: These loans are popular with house flippers who buy properties, fix them up, and then sell them for a profit. They can also be useful for investors who want to buy a property before selling their current one, or for those facing foreclosure who need a quick cash infusion.
Pros: Faster approval process compared to traditional lenders, more flexible eligibility requirements, and the ability to finance properties that traditional lenders might reject.
Cons: Higher interest rates than conventional loans, shorter loan terms, and the risk of losing the property to foreclosure if you can’t repay the loan.
Here are some additional things to keep in mind about hard money lenders:
Interest rates: Be prepared for interest rates that are significantly higher than what you would get from a traditional lender. Rates can range from 6% to 14% or more.
Loan-to-value ratio (LTV): Hard money lenders typically lend up to 65% to 75% of the property’s ARV. So, if you’re buying a fixer-upper, you’ll need to have a good chunk of cash on hand for the down payment and renovations.
Due diligence: It’s important to do your due diligence before working with a hard money lender. Make sure they are reputable and have a good track record. Get everything in writing, including the loan terms, interest rate, and fees.
Overall, hard money lenders can be a valuable resource for real estate investors, but it’s important to understand the risks involved before taking out a hard money loan.
Ground up construction loans
Short-term financing solutions called “ground-up construction loans” are made expressly to pay for the costs associated with starting from scratch while developing anything new. Single-family homes, apartment complexes, and mixed-use developments with both residential and commercial space can all fall under this category. They are not like conventional mortgages in several important aspects:
- Shorter term: Ground-up construction loans are meant to bridge the gap during the building phase, typically lasting 9 to 24 months.
- Interest-only payments: You typically only pay interest on the amount of the loan that has been used so far, rather than the full amount.
- Focus on project value: Lenders will assess the value of the finished property (called the After-Repair Value or ARV) to determine how much they’re willing to lend.
Who uses them?
These loans are ideal for:
- Real estate investors or developers looking to construct new properties for investment purposes.
- Builders or contractors who own land and want to finance the construction of a property to sell.
Benefits:
- Quicker funding: Compared to traditional bank loans, ground-up construction loans can sometimes have a faster closing process.
- Potentially lower upfront costs: Since you only pay interest on the used portion of the loan, there can be lower upfront costs compared to a traditional mortgage.
- Financing flexibility: Some lenders may allow financing for both the land acquisition and construction costs rolled into one loan.
Things to Consider:
- Higher interest rates: Ground-up construction loans typically come with higher interest rates than conventional mortgages.
- Qualifications: Lenders may have stricter qualification requirements, including experience in construction projects, a strong financial position, and a well-defined development plan.
- Security: The property itself often serves as the collateral for the loan.
Finding the right loan
When contemplating a construction loan, it’s crucial to evaluate conditions and interest rates offered by several lenders. Make sure you have a realistic budget for the whole project, including construction costs and potential overruns, and that you are aware of all the fees related to the loan.
Benefits of Hard Money Commercial Construction Loans
Speed: The biggest advantage of hard money loans is the expedited approval process. This is crucial for developers who need to move quickly to secure a property or meet tight construction deadlines.
Flexibility: Hard money lenders offer more flexibility in terms of loan structures and terms compared to traditional lenders. This allows for customization to fit the specific needs of your project.
Feasibility for Lower Credit Borrowers: While not the sole factor, hard money lenders place more emphasis on the project’s potential and the value of the collateral (property) than the borrower’s credit score. This can be beneficial for developers with less-than-perfect credit who might struggle to secure traditional financing.
Things to Consider with Hard Money Commercial Construction Loans
Higher Interest Rates: Because hard money loans are considered higher risk for lenders due to the shorter terms and focus on asset value, they typically come with higher interest rates than traditional bank loans.
Shorter Loan Terms: Hard money construction loans are typically short-term financing solutions, often lasting 12-24 months. Borrowers need to have a clear exit strategy, such as refinancing into a permanent loan or selling the completed property, to repay the loan before the term ends.
Escrow Disbursement: Hard money lenders often disburse funds in stages as the project progresses and meets pre-determined benchmarks. This ensures the funds are used for the intended purpose and mitigates risk for the lender.
Who Should Consider Hard Money Commercial Construction Loans?
Hard-money commercial construction loans are a good fit for experienced developers who need fast and flexible financing for their projects. They can be particularly useful for:
Fix-and-flip projects where a quick turnaround is essential.
Ground-up construction of commercial properties where traditional financing might be difficult to obtain.
Developers with lower credit scores who have a solid project plan and valuable collateral.
Conclusion
Developers that need to act rapidly and have options for funding can benefit greatly from hard money commercial construction loans. You may decide whether a hard money loan is the best option for realizing your commercial building project by being aware of the benefits and factors to take into account.
I am Henry, a professional in commercial financing with more than 10 of experience under my belt in this industry. Over the years, I have committed my tenure to the professional guidance of some of the businesses out there just like yours through the complex truths of a commercial loan process. I have developed such fervent interest and commitment to truly making it possible for many clients to get funding which enables them to develop and grow.
