Commercial Loans Blog

Equity for Commercial Real Estate - Not Commercial Loans - Equity!

Posted by George Blackburne on Fri, Jul 26, 2013

This is an immensely important blog article for you.  If you can make the leap from just arranging commercial real estate loans (debt) to arranging both commercial real estate debt and real estate equity, you will have truly become a commercial real estate financier.

The first step to becoming a true financier is to understand the concept of equity.   The link above is an article that you should read first before going any further.  I please mean it.  Equity has about a dozen different definitions, depending on the situation.  Please read this article first before going any further.

Okay, now that we understand the concept of equity, let's talk about the cost of equity.

Equity is the first-loss piece.  It's kind of like that old joke:  What do a divorce and a tornado have in common?  Answer:  Somebody is going to lose a trailer.  If anyone is going to take a loss in a real estate deal, its going to be the holder or the contributor of the equity.

For example, let's suppose four yuppies pool their savings to buy a rental duplex in Council Bluffs, Iowa.  Between the four yuppies, they put 30% down on a $200,000 purchase price.  Crop prices suddenly fall, over-leveraged farmers across the country start losing their farms in foreclosure, and John Deere closes the nearby manufacturing plant.  Ten thousand workers are laid off in Council Bluffs, and rents plummet.

The yuppies can no longer find tenants for their rental duplex, they fall behind in their mortgage payments, and eventually the house sells at the foreclosure sale for $150,000.  After the $10,000 selling costs (foreclosure trustee, title policy, closing costs, etc.), the bank nets $140,000 - enough money to be repaid in full.

All is well, right?  Not if you contributed the equity!  The first people - and in this case, the only people - to lose money in this failed investment were the contributers of the equity.  They lost their entire $60,000 downpayment.  Equity is always the first-loss piece.

Remember, we're talking about the cost of equity.  Investing in equity is very, very risky, and in order to attract investors, the potential return has to be higher than what they can receive in competing real estate investments.

Well, banks are making commercial first mortgages at around 5.5%.  Their loans are pretty safe, typically just 65% LTV to good credit borrowers.  Hard money lenders are offering investments in commercial first and second mortgages at rates of between 10% and 14% (and they charge their borrowers 3 to 5 points as well).  Even hard money second mortgage investments are far safer than equity investments.

Therefore, you should not be surprised to learn that equity investors want to earn at least 16% to 20%.  In addition, the broker syndicating the investors is going to charge at least 6 to 10 points.  This isn't just what Blackburne & Sons is charging.  This is the market.  Equity is expensive.

Equity money is also very difficult to raise because of the risk.  Therefore, Blackburne & Sons can only raise equity for commercial real estate projects in amounts of between $150,000 and $600,000.  In other words, we play only in the minnow pond when it comes to equity.

Here are some sample scenarios:

  1. The owner of a company has a balloon payment coming due on his industrial building.  He owes $2 million.  The property was once worth $3 million, but after the Great Recession it has fallen to just $1.9 million.  The bank has offered to accept a discounted pay-off (DPO) of just $1.35 million, but the largest new mortgage he can find is $1.1 million.  He is $250,000 short, and he doesn't have the dough to make up the difference.  Blackburne & Sons may be able to raise the $250,000 short-fall.
  2. An experienced commercial real estate investor spots the deal of a lifetime - a partially leased office building in an affluent part of town that would cost $3 million to rebuild.  The seller has accepted a $2 million purchase offer, and the buyer has 25% ($500,000) to put down.  The buyer approaches every bank in town, but none of them (the big sissies) will lend more than $1.1 million because of the vacancies.  Blackburne & Sons may be able to raise the $400,000 short-fall for him.

We will pay referring brokers a finder's fee of 2 points on the net amount ($250,000 and $400,000 in the examples above) of the equity we raise.

Got a potential equity deal?  Please call or write Angela Vannucci, Vice President and the General Manager of our Equity Department, at 916-338-3232 or email her at angelav@blackburne.com.

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Topics: equity money, equity

Commercial Loans and Newsletters

Posted by George Blackburne on Thu, Jul 25, 2013

Advertising directly to the public for commercial loans simply does not work ... at all.  What does work is sending out a newsletter regularly to a small list of referral sources - folks who, because of their jobs, see lots of commercial loan requests coming across their desk every week.

Bankers and commercial real estate brokers are, by far, the best referral sources.   The next best referral sources of commercial loans, with the better ones listed first, include property managers, residential mortgage brokers (on a name and number referral basis ONLY), residential real estate brokers, other commercial lenders, attorneys, CPA's, and financial planners (life insurance agents).

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Please Click Here ToBuy Commercial Lead

So we all now know WHAT to do to attract more commercial financing requests; but too few of you commercial mortgage brokers are regularly sending out newsletters.  I think the problem is that you think you have to make your newsletters too long and fancy.

For twenty years I used snail mail to send out my newsletters.  I wrote these newsletters on the front and back side of a legal-sized sheet of copy paper.  I used no fancy fonts, and the newsletters contained no color.  They were simply black and white.  These newsletters worked just fine - better than fine, actually.

Today email is much faster and cheaper than snail mail.  If you get slow, you can write a commercial mortgage newsletter in an hour and blast it out immediately to your contacts.  It does not have to be fancy!  You should start with a plain-text email newsletter.  Just make sure that it is jammed full of fun stuff - jokes, interesting stories you've recently heard, movie reviews, book reviews, cool things that you have seen or heard recently, and stories about your family.

"But George, where am I going to get jokes for my commercial loan newsletter?"  Just steal mine from here.  You'll find hundreds of cute, clean jokes.

The lesson I want to drive home to you today is this:  Start sending out commercial mortgage newsletter every ten to 21 days, even if it is very short and very simple.  Stop making excuses, and get it done.  All you are really trying to do is keep your name and contact information in front of your referral sources.

I recently wrote a commercial real estate loan newsletter to my commercial mortgage brokers of which I was very proud.  Come take a peak at my recent newsletter.  Yours does not have to be anywhere near this fancy.  Remember, I have been writing newsletters for thirty years.

Just make SURE your commercial mortgage newsletters are jammed full of Rat Goodies.  Think of your newsletter as an hour-long TV show.  There are 48 minutes of the actual TV show - the cops chasing the bad guys - and every twelve minutes there is a BRIEF word from the sponsor.  Therefore, most of your commercial mortgage newsletter should be devoted to entertainment.  When you do mention your commercial real estate loan services, it should be done quickly and just in passing.

Be sure to review this five-slide lesson on Rat Goodies.

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Topics: newsletters

EB-5 Commercial Loans and the EB-5 Program

Posted by George Blackburne on Wed, Jul 17, 2013

America needs more jobs for its citizens.  Many wealthy foreign investors wish to immigrate to the United States.  Why not make a deal?  If a foreign investor starts a company here in the U.S. that creates enough new jobs for Americans, the foreign investor can immigrate to the U.S.

This is exactly what Congress has done.  It has created the United Sates Citizenship and Immigration  Services’  EB-5  Immigrant  Investor  Pilot  Program  (the  “EB-5 Program”).  The program has been very successful in creating good-paying jobs here in the U.S.  Last year $1.2 billion worth of EB-5 loans were closed.

The program is also very popular among wealthy foreign investors wishing to emigrate.  The entire quota of 7,500 visas were issued last year.  There is talk of increasing the quota to 10,000 visas soon.

Basically these foreign investors are paying to jump to the head of the line for a visa.  These investors do care about the success or failure of their investments; but the return on their investment is secondary to gaining the right to move to the U.S.

The entire process of EB-5 funding is a program developed by the United States Citizenship  Immigration Service (USCIS) known as EB-5 Pilot program.  USCIS is a division of Homeland Security.

The EB-5 process can offer foreign immigrants a fast track path to obtaining US Visas for their "entire family". Simply said, by investing $545,000 into an approved United States Citizenship and Immigration Services (SCIS) project under the EB-5 Pilot Program that will successfully create 10 U.S. jobs for every $545,000 invested, an entire  family can obtain Visas into the U.S. within 6 to 8 months.

Potential EB-5 investments (usually structured as mezzanine loans) are not usually sold on a one-off basis to individual foreign investors.  The paperwork is far too extensive for small deals.  Instead, specialized investment bankers in China (and other countries) raise around $30 million to $35 million per offering in units of $545,000 per investor.

Therefore EB-5 commercial loans are very, very large, and most EB-5 loans are structured as multifamily or commercial construction loans.  However, EB-5 loans have been successfully used to finance solar power facilities, convention centers, student housing, corporate headquarters, residential communities, mixed use properties, county sheriff's offices,  chemical plants, stadiums, dental schools, and roadways.

Usually the total project cost is at least $20 million, and ideally in excess of $100 million.  In the hypotheical case of a $100 million commercial construction project, the borrower-developer usually obtains a $55 million conventional construction loan.  The EB-5 loan regional office provides a mezzanine loan of, say, $30 to $35 million, and the borrower-developer contributes $10 million to $15 million in cash and equity.  Smaller EB-5 loans have also been done in less populated states, sometimes down to as small as $10 million.

Put another way, developers can now use EB-5 funds as a component of their project capital stack. The EB-5 component can be best described as a typical mezzanine loan that will be secured with the developers interest in the project, subordinated to the senior loan, but fully non-recourse.

The EB-5 loan interest depends on the overall project details, including the experience and strength of the developer; however, the cost of an EB-5 mezzanine loan (8-10%) is considerably less than a typical mezzanine loan (15-18%).  Furthermore, the developer can substitute expensive equity investors with an EB-5 mezzanine loan, whereby the senior lender will accept a portion of the developer's equity from the EB-5 mezzanine loan funding.

The normal breakdown of the capital stack is something like the following:   
 
    Senior Lender (construction and Acquisition)        55%   
    Developer's Equity                                           10-15%
    EB-5 Funding                                                  30-35%

Generally speaking from the time that we receive a confirmation from the developer that they want to proceed by signing the term sheet, we anticipate that within about 6 months time the funds will be available to begin funding the project.

If you have a project that seems to meet these requirements, please send me, George Blackburne III (the old man), an email at george@blackburne.com.  In the subject line, please type, "EB-5 Loan".

And by the way, have you subscribed to this blog yet?  Please find my ugly mug shot above and then insert your email address immediately below it.  At least two to three times per week your understanding of commercial mortgage finance will be advanced.  Remember, every subject in every one of my expensive training courses was covered here first in this free training blog.

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Topics: EB-5 loans

New Unsecured Business Loan Program

Posted by George Blackburne on Fri, Jul 12, 2013

If your commercial loan client owns a business - even if his credit is flawed and he owns no commercial real estate - he might be able to borrow between $10,000 and $500,000 based solely on his signature!  Some of the uses can be to bolster liquidity, to pay for third party costs - like appraisals, environmental's, etc. - or for any other need.

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Using this program, you can get your business-owner-clients money within just three to five business days without any collateral.  There are no up-front fees to get this loan.

There is no requirement to own commercial real estate either.  Your borrower could just be renting commercial space.  There are no mortgage or UCC costs or liens.   It is strictly a signature loan.  Credit can be as low as a 500 FICO to qualify.

The key issue with this program is that the borrower must own a business.  He can borrow up to 10% of his annual sales / revenue.

Please note, however, that the type of business must be one where a little bit of revenue comes in to the company almost every day.  For example, a beauty salon or a mini-mart would qualify.  An oil change or auto repair shop should qualify.  A manufacturing company with shipments going out almost every day would qualify.  On the other hand, a real estate brokerage (or mortgage brokerage) company would not qualify because their income is commission-based (its hit-or-miss).

Why is the frequency of fresh income so important?  These unsecured business loans are obviously very high-risk loans.  The interest rate is priced accordingly, and the repayment schedule call for very small, daily payments that are automatically deducted.  There needs to be fresh income coming in very frequently to the borrower's business account to ensure there is enough available dough to make the payments.

A buddy of mine used this program to get his client a quick $50,000 when his client's credit deteriorated so badly that his SBA loan was turned down.

This program was also used recently to raise the money for third party reports.  In this case, the borrower owned commercial real estate, and he was trying to borrow almost $500,000 secured by his industrial building.  The problem was that the borrower's cash flow was so overstretched at the the moment that the borrower couldn't come up with the $6,000 he needed for the appraisal and toxic report.  This borrower was able to use this quick, unsecured commercial loan program to borrow the money necessary to eventually obtain a $500,000 commercial real estate loan!

The paperwork requirements are pretty easy too - just a 1003 loan application, a credit report, 12 month's worth of bank statements for the company, and last year's company tax returns.  As I mentioned earlier, there are no application fees, and your client will have an answer within just 3 to 5 days.

Broker's can charge up to two points, which is a really sweet deal considering you'll have a yes or a no within just three to five days.  Remember, these loans are unsecured, so there is no waiting for third party reports.  Bing-bang-boom ... and you'll have a nice commission check in your pocket.

Got a potential deal?  Please send me an email at george@blackburne.com with your contact information and a brief description of the deal.  In the subject line, please type, "George's Special Unsecured Business Loan."  Thanks!

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Topics: Unsecured business loans

Loan-to-Cost Ratio and Commercial Loans During Economic Upheaval

Posted by George Blackburne on Tue, Jul 9, 2013

When the Great Recession first began to bite in late-2007, sales of commercial properties began to plummet.  Investors didn't want to buy commercial properties when they could see the economy headed off a cliff.  For commercial property appraisers, sales comparables became almost impossible to find.

By mid-2008, new commercial mortgage lending fell by 85%; however, between mid-2007 and mid-2008, a few bold commercial lenders stayed in the market.  They did not, however, base their new commercial loans on appraisals.  Instead, most new commercial lending was based on cost and the loan-to-cost ratio.

By the way, if you happen to need a commercial real estate loan, you can submit your commercial loan to 750 different commercial lenders in just four minutes using C-Loans.com.  Simply click the button below.

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This proved to be a pretty rational decision by commercial loan underwriters because very few commercial properties were actually selling.  Commercial real estate eventually fell by a whopping 45%.

Therefore we can actually create a new theorem of commercial real estate finance.  During times of economic upheaval, when the stock and bond markets are getting crushed, commercial real estate lending is based more on cost rather than on cap rates, debt service coverage, and estimates of fair market value.

Let me provide an example.  The year is 2021.  Commercial real estate has enjoyed a steady bull market since the depths of 2009.  In fact, the rate of commercial real estate appreciation speeded up so sharply in 2019 and 2020 that old veterans once again began talking about "unsustainable bubbles".  The Young Turks continued to pooh-pooh their fears and poured hundreds of billions of dollars into new commercial real estate construction.

Then the rate of space absorption (new leases) began to slow markedly.  Commercial real estate sales fell by 50%.  The stock market seemed to hit a ceiling.  It just lacked the momentum to climb to new highs.

You're in your late-40's right now, and your job at your commercial mortgage company is to serve as the senior member of Loan Committee.  A wealthy and experienced developer brings in an interesting deal.  He has found a troubled bank willing to sell a near-Class A office building in booming Austin, Texas upon which the toubled bank has foreclosed.  The building enjoys a terrific location.  All it needs is some cosmetic work - say, a new fascade, new signage, and fresh tenant improvements - to restore it to its full Class A potential.

He can buy the REO from the bank for a mere $10 million.  Throw in $2 million for the upgrades, and every appraiser in town would agree that the property would be worth (fair market value) $18 million.  He's willing to contribute $1.5 million to this acquistion and renovation project, leaving your mortgage fund a first mortgage bridge loan of just $10.5 million on a building worth $18 million (58.3% LTV). 

So, do you make this loan?

Maybe not!  During times of economic upheaval, underwriting based on fair market value should go out the window.  During such times, its all about cost-cost-cost. (It's always about Marcia-Marcia-Marcia.) 

Let's look at the deal from a loan-to-cost point of view.  You're being asked to make a bridge loan of $10.5 million on a project that costs just $12 million ($10 million acquisition plus $2 million in renovation).  That's a Loan-to-Cost Ratio of 87.5%.  That's much too high.

The wise commercial mortgage underwriter should cut his bridge loan offer to no more than $9 million (75% loan-to-cost) and make the sponsor bring in $3 million to the closing table.

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Topics: loan-to-cost during upheaval

Loan-to-Cost Ratio in Renovation and Fix-and-Flip Commercial Loans

Posted by George Blackburne on Mon, Jul 8, 2013

Okay, we're halfway done discussing the loan-to-cost ratio in commercial mortgage finance.  So far we've discussed how to compute the total cost of a commercial project.  We have also discussed the loan-to-cost ratio in new, from-the-ground-up, commercial construction loan underwriting.

Today we're going to talk about the use of the loan-to-cost ratio while underwriting renovation commercial loans and fix-and-flip commercial loans.

By the way, if you happened to find this article because you were looking for a renovation loan or fix-and-flip commercial loan, you can submit your commercial renovation loan request to hundreds of hungry commercial construction lenders by clicking the button below:

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The difference between a renovation deal and a fix-and-flip deal is that the fix-and-flip property will be offered for sale immediately upon completion.  A property that is the subject of a renovation loan may, or may not, be sold upon completion.  It might just be kept in the investor's portfolio and leased out for income.  In either case, renovation deals and fix-and-flip deals are underwritten in exactly the same manner.

Renovation loans and fix-and-flip loans are underwritten just like commercial construction loans (or even residential construction loans).  The only difference is that the Land Cost will include the cost of acquiring both the underlying land and the building in need of renovation.

An example will make this concept more clear.  Suppose a property renovator ("the Flipper") spots an older rental house, zoned commercial, in need of repair on a busy commercial strip in an affluent area of town.  He can buy the old rental house for $130,000, convert it into a cute little office building, and either lease it out or sell it for $325,000.

The house will need a new roof ($14,000), a handicap access ramp ($9,000), new exterior siding ($5,000), new paint ($8,000), new carpet ($6,000), and various repairs totaling another $7,000.  Therefore the Hard Costs of the renovation will total $49,000.

There will also be Soft Costs of $22,000 for the appraisal, toxic report, loan points, title insurance, attorney's fees, closing costs, construction period interest, and leasing commission.

Every new construction loan or renovation loan needs a Contingency Reserve of around 5% of hard and soft costs.  In this example, our Hard Costs are $49,000 plus our Soft Costs of $22,000 total $71,000.  Five percent of $71,000 gives us a Contingency Reserve of $3,550.

Therefore our Total Cost is:

Land and Existing Building (old rental house) ... $130,000
Hard Costs ..................................................    49,000
Soft Costs ...................................................    22,000
Contingency Reserve ....................................      3,550

Total Project Cost ......................................... $204,550

So how much dough (equity) will the Flipper be required to contribute to this fix-and-flip deal? That's up to the lender.  A reasonable loan-to-cost ratio in today's improving real estate market might be as high as 75%.  Therefore a prudent commercial lender might be willing to make a new acquistion and renovation loan of 75% of $204,550 or $153,412.

Okay, so the Total Cost of the project is $204,550.  The "construction lender" will make a loan of $153,412.  Therefore the Flipper will have to cover the difference of $51,138.

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Topics: Fix and Flip Loans

Loan-to-Cost Ratio and Commercial Construction Loans

Posted by George Blackburne on Sat, Jul 6, 2013

This is the second of four blog articles that I will write on the subject of the loan-to-cost ratio in commercial mortgage finance.  You will recall that last week I wrote an article on how to compute total cost.  Later this week I hope to write a blog article on the loan-to-cost ratio in renovation finance and a second blog article on the loan-to-cost ratio during times of economic turmoil.

By the way, if you happened to find this article because you were looking for a commercial construction loan, you can submit your commercial construction loan request to hundreds of hungry commercial construction lenders by clicking the button below:

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Today we are going to talk about the loan-to-cost ratio in commercial construction lending.  The Loan-to-Cost Ratio is defined as the (construction) loan amount divided by the Total Cost of the project, times 100%.

Suppose an experienced and reputable developer came up to you and said, "Listen, I want to build a $2 million apartment building.  I almost have enough cash on hand to build it entirely without outside financing.  All I need for you to do is to loan me $800,000.  I'll give you a first mortgage on the apartment building at an attractive interest rate, and before I spend one penny of your money on the project, I will first spend $1.2 million of my own dough getting the property 60% completed.  You can even control your $800,000 so you can be sure your money will be used to complete the project."

So ... would you do that deal?  Heck, yes!  The developer is the one taking most of the risk, and if he doesn't pay you, you can foreclose on a $2 million apartment building.  You kind of knew that intuitively, but how would you know that mathematically?

Well, let's compute the Loan-to-Cost Ratio.  Eight hundred thousand dollars (the construction loan amount) divided by $2 million (the Total Cost) times 100% gives you a Loan-to-Cost Ratio of just 40%!  The developer is covering a whopping 60% of the cost.  This is a wonderful loan!

Okay, but we're dreaming here.  No developer in real life is ever going to cover 60% of the total cost.  So what is a reasonable Loan-to-Cost Ratio?  During normal times, commercial banks - the lenders who make 95% of all commercial construction loans - will usually make commercial construction loans at 80% of cost.

During go-go times, when commercial banks are cutting each other's throats to get business, commercial construction loans of 90% loan-to-cost were not uncommon.  If the developer was VERY wealthy and VERY experienced, the commercial bank might even lend up to 100% loan-to-cost.  Of course, many of those commercial banks who went 90% to 100% loan-to-cost subsequently failed during the next real estate recession that seems to hit every seven to twelve years.

Today we are climbing out of the Great Recession.  Commercial banks caught in commercial construction loans during the Great Recession got mauled, so during the Great Recession almost all commercial construction financing disappeared.  Even today, very few commercial banks are actively competing for construction deals.

Nevertheless, the economy is recovering.  Construction loans are usually very, very profitable for banks, and they are short term loans.  A few commercial banks today are once again dipping a toe into the construction loan waters.

So what is a reasonable Loan-to-Cost Ratio today?  Today few commercial banks will make commercial construction loans in excess of 65% to 70% loan-to-cost.  In other words, the developer has to cover 30% to 35% of the Total Cost. 

The good news is that, as the recovery becomes more convincing, commercial banks will start to compete against each other for good deals.  I predict that within six months commercial construction loans of 75% loan-to-cost will become commonplace.

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Total Cost and Commercial Construction Loans

Posted by George Blackburne on Tue, Jul 2, 2013

In my next blog post we are going to talk about the Loan-To-Cost (LTC) Ratio in commercial construction financing; but in order to understand that next article, you must first understand the concept of the Total Cost.

In commercial real estate finance (CREF), the Total Cost of a commercial construction project is the sum of the (1) Land Cost, the (2) Hard Costs, the (3) Soft Costs, and the (4) Contingency Reserve.  By the way, you can submit your commercial construction loan request to several hundred commercial construction lenders by clicking on the button below:

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The Total Cost should be at least 20% to 25% less than the completed property's fair market value upon completion; otherwise, why would the developer take on the construction risk of the project?  There has to be some anticipated profit in the deal.

The Land Cost is usually what the developer paid for the land, but not always.  I recently saw a commercial construction loan request in Brooklyn where the developer bought the land in 2005.  Since 2005, land in Brooklyn has skyrocketed because the borough is being gentrified. Due to a material pasaage of time and some major demographic changes to the area, it would be legitimate to use the current fair market value of the land as the land cost in the calculation of Total Cost.

Another example of legitimately using a Land Cost higher than the developer's actual cost is assemblage.  Suppose a developer successfully purchased three adjacent old rental houses on a busy commercial strip.  With the acquisition of the land under all three houses, the developer can now bulldoze the houses and create a VERY valuable future site for a strip center.  When the whole is significantly more valuable than the cost of the parts, this is an example of assemblage.

The Hard Costs are the bricks and mortar - tangible improvements that you can touch and feel.  This includes line items like clearing the land, excavating the pad, grading, installation of underground utilities, the rough and finish carpentry, the rough and finish plumbing, etc.

The Soft Costs are the financial, legal, and/or paper costs of a commercial construction project.  Examples include construction period interest, loan points, appraisals, toxic reports, title insurance premiums, plan check fees, permit fees, sewer hook-up fees, etc.

All commercial construction lenders require a Contingency Reserve of around 5% of the hard costs and soft costs.  This reserve is designed to cover cost over-runs.

Once again, the Total Cost of a commercial construction project is the sum of the following:

1.  Land Cost

2.  Hard Costs

3.  Soft Costs

4.  Contingency Reserve

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Topics: Total Cost