Commercial Loans Blog

Commercial Construction Loans That Are Dead on Arrival - Napkin Test

Posted by George Blackburne on Sat, Mar 25, 2017

Construction loan.jpgHow can you tell if a commercial construction loan request is dead on arrival?  The most common reason why a bank will reject a commercial construction loan is because the developer has not contributed enough equity.  Quick aside:  Ninety-nine percent of all commercial construction loans are made by banks.  What constitutes equity?  I recently wrote an excellent article on equity for development projects.

 

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Here is a quick napkin test that will tell you whether or not you should waste your time working on a construction loan request.  Compute the Loan-to-Cost Ratio by simply dividing the Construction Loan Request by the Total Cost of the project.  The Loan-to-Cost Ratio must 75% or less in the post-Great-Recession market.  Put another way, the developer must pay for at least 25% of the Total Cost.

 

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Because I've been doing this for 37 years, I can compute a Loan-to-Cost Ratio in less than one minute; but maybe a quick review will be helpful for you. The Loan-to-Cost Ratio ("LTC") is defined as the Construction Loan amount divided by the Total Cost of the project (all multiplied by 100%).

Loan-to-Cost Ratio = Construction Loan / Total Cost

Historically banks were satisfied if the Loan-to-Cost Ratio was 80% or less.  In other words, banks were satisfied if the developer was paying 20% of the Total Cost.  That 20% of the Total Cost represented his equity or, in the parlance of commercial mortgage finance, his skin in the game.  Unfortunately after the huge losses suffered by banks in commercial construction lending during the Great Recession, most small banks today limit their loan-to-cost ratios to just 65% to 72%.

The big banks, when making the really large commercial construction loans ($20 million+), limit their loan-to-value ratios to just 55% to 60%.  Fifty-five percent???  Yup.  Ouch!  How can a developer come up with 45% of the Total Cost?  There is a type of equity called gap equity, that takes a developer from 55% LTC up to 80% LTC.  I hope to blog on the subject soon.

 

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Now in order to compute your Loan-to-Cost Ratio, you will need to know the Total Cost. Total Cost is defined as the sum of the land cost, the hard costs, the soft costs, and the contingency reserve (5% of hard and soft costs).

Total Cost = Land Cost + Hard Costs + Soft Costs + Contingency Reserve

Most developers underestimate their Soft Costs.  The Soft Costs include such things as architectural fees, engineering fees, report fees (environmental impact reports, appraisals, toxic reports, geological reports, surveys, etc.), governmental fees (plan check fees, inspection report fees, sewer hook-up fees, etc.), bonding fees, title commitment fees, attorneys fees, loan fees, mortgage broker fees, and the interest reserve.  Everyone underestimates the interest reserve.   Soft costs usually range from 40% to 55% of hard costs.  If you don't trust the developer's soft costs, use at least 40% of the hard costs for soft costs.

The Contingency Reserve should be 5% of hard and soft costs.  Why not 5% of the Land Cost as well?  Most developers already know the exact cost of the land.  There is unlikely to be a cost overrun on the land.

 

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Are you a wealthy developer or investor?  The sister company of C-Loans, Inc. is Blackburne & Sons Realty Capital Corporation.  We have been selling 8% to 12% first mortgage investments to wealthy private investors for 37 years.  We currently have around 1,500 private investors, and we are servicing a portfolio of over $50 million.  Due to a recent law change (JOBS Act), Blackburne & Sons can now accept investments from accredited investors (gotta be accredited) as small as $10,000 in each loan from anywhere in the country, not just California.

This is a family firm.  I'm George III, the founder and the dad.  I am a licensed attorney in both California and Indiana.  My sons, George IV (Ohio State) and Tom (Purdue), are both Eagle Scouts, as am I.  Cisca and I have been married for 34 years.  (My staff have nominated poor Cisca for sainthood.  Ha-ha!)  My point is that we are steady-eddie folks.

You should sit on our investor mailing list for a couple of years and then someday try us with a tiny investment (as small as $5,000 in your first deal) in one of our loans.  We are not a fund!  Hard money mortgage funds tend to (85% of the time) fold up with ugly consequences during bad recessions.  In contrast, if you invest with us you will actually own, say, 7%, of the first mortgage.  But you must be an accredited investor!

 

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Many commercial mortgage brokers are excellent salesmen, but they starve because they make a dozen preventable mistakes every single day.  This 5-hour course in the Practice of Commercial Mortgage Brokerage contains more than 60 practical lessons in commercial mortgage brokerage.  I consider it to be the crown jewel in my training series, the best of my life's work.  It is the only course I sell that comes with a 100% satisfaction guarantee.

 

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We have a superb multifamily program with "A" quality rates for deals with a tiny black hair on them.

 

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Blackburne & Sons, my own hard money shop, offers bridge loans for just 1 point.

 

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Do you own a real estate or mortgage website?  By simply putting a "Commercial Loans" link to C-Loans.com on your web site, your web site can work day and night to generate referral fee income.  We once paid $21,250 to a guy named Alan Dunn.  Somebody came to his website, saw a "Commercial Financing" link, clicked on it, came to C-Loans.com, and then applied for $17 million loan.  Alan was asleep at the time!  (We actually have no way of knowing that, but Alan certainly could have been asleep, and it makes for a great story.  Ha-ha!

 

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Have you tried our latest commercial mortgage portal?  CommercialMortgage.com has four times more lenders than C-Loans.com, and it is far easier to enter a deal.

 

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Is it finally time to actually learn the profession that you practice?  Just sayin'...

 

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Topics: commercial construction loans

How Commercial Construction Loans Are Underwritten

Posted by George Blackburne on Tue, Jun 21, 2016

commercial_construction-2.jpgI just completed a new training article on how commercial construction loans are underwritten.  It was the hardest subject that I have ever attempted because bankers use five different financial ratios when underwriting commercial construction loans.  The article took me two weeks to write.

 

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If you are involved in commercial real estate construction, development, sales or finance, you will greatly benefit from mastering this subject.  The Loan-to-Cost Ratio, Total Construction Costs, Hard Costs, Soft Costs, Contingency Reserves, the Profit Ratio, and the Net-Worth-to-Loan-Size Ratio will suddenly because part of your daily lexicon.  After reading this article, commercial real estate finance will hold few remaining mysteries for you.

 

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And folks, this stuff is not that hard.  If you paid attention in fifth grade math, you can master this stuff.  Prepare to be wowed.  Read this great article here:

 

http://www.c-loans.com/knowledge-base/underwriting-commercial-construction-loans

 

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Keep looking for the business card or the contact information of any banker making commercial real estate loans.  We'll trade you the contents of that one business card for a free directory of 2,000 commercial real estate lenders.

 

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Do you sell commercial real estate?  If so, then by all means open a commercial mortgage company (a desk, a phone, and a body)!  Why?  Because there is no better way to meet high-net-worth individuals than to own a comemrcial mortgage company.  Poor people don't own $5 million shopping centers.

 

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Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months? Do you need a lender who will allow a negative cash flow? Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national? Do you need a non-recourse loan?

 

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Topics: commercial construction loans

Commercial Construction Lenders Require Equity From the Developer

Posted by George Blackburne on Sat, Dec 12, 2015

Apartment_Construction.jpgDevelopers, now is the time to apply for a commercial construction loan.  Mortgage brokers, now is the time to resume brokering commercial construction loans.  The economy is pretty healthy, and commercial banks are hungry to put their $2.7 trillion in excess reserves to work.  By the way, if you want a commercial construction loan, you will want to apply to a commercial bank, rather than to a mortgage company.  Commercial banks make 98% of all commercial construction loans.  However, developers, you need to have some skin in the game.

One of my commercial construction loan officers called me yesterday.  He had a developer who is building a $33 million apartment building in Florida.  The developer is buying the land for $2.7 million, and he has a term sheet for a purchase money first mortgage for $1.7 million.  He wanted a second mortgage on his purchase of the land for $800,000.  Who out there immediately spotted this as a goofy loan request?

term sheet is defined as a loan proposal or conditional commitment letter (same thing) from a commercial real estate lender.  Appraisals and toxic reports are so expensive in commercial real estate finance that borrowers want at least a moral commitment from the bank before shelling out $4,500 to $8,000 for these third party reports.  A term sheet is legally worthless, but in real ife it means that the borrower is probably going to get the loan at the proposed terms, as long as the third party reports come back okay.

 

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Now back to my story.  Why was this a goofy loan request?  Answer:

  1. No one makes second mortgages on land (other than sellers carrying back part of the purchase price).

  2. The bank is going to insist that the developer contribute at least 20% of the total cost of the project.  Normally - but not always - this means that the developer has to bring the land to closing table (almost) free and clear.  More on this below.

 

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Before we go any further, let's define a few terms.  The Total Cost of a commercial construction project is defined as the sum of the land costs, the hard costs, the soft costs, and the contingency reserve (normally equal to 5% of hard and soft costs).

Total Cost = Land Cost + Hard Costs + Soft Costs + Contingency Reserve

The Loan-to-Cost Ratio is the most important ratio in commercial construction loan underwriting.  The Loan-to-Cost Ratio is defined as the Construction Loan Amount divided by the Total Cost, times 100%.

 

Loan-to-Cost Ratio = (Construction Loan Amount / Total Cost) x 100%

 

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Example:  Let's suppose a developer wants to build a three-unit industrial center in Austin, Texas.  He needs a $3.2 million construction loan, and his total cost is $3.8 million.  What is his Loan-To-Cost Ratio?

Loan-to-Cost Ratio = ($3,200,000 / $3,800,000) x 100% = 84.2%

This ratio is too high.  Unless the developer can raise more equity, the loan will be turned down.

For most commercial construction lenders, the Loan-to-Cost Ratio must not exceed 80.0%.  In other words, the developer must cover at least 20% of the Total Cost of the project.  This kind of makes sense.  The bank doesn't want to take all of the risk.  The developer must stand to lose some serious dough if the project goes South.  The developer must have some skin in the game.

Okay, now let's go back to the goofy commercial construction loan request I cited at the very beginning of this training article.  You will recall that it was a $33 million apartment construction loan request.  Well, we know that the developer and his investors are probably going to be required to contribute 20% of the $33 million Total Cost; i.e., $6.6 million. 

Now the developer is buying the land for $2.7 million.  He has a term sheet for a $1.7 million new first mortgage, and on top of that, he wanted an $800,000 second mortgage.  In other words, he was only contributing a $200,000 downpayment on a $33 million project.  His Loan-to-Cost Ratio was 99.4%!  Somebody has been partaking of that Colorado medicinal tobacco.  Ha-ha!

Remember, most commercial construction lenders want the developer to bring the land to the deal free and clear, or at least pretty close to free and clear.  In most commercial construction deals, the land represents between 20% to 25% of the Total Cost, and that, along with architectural and engineering fees, is where most developers have spent their required equity.

Do you know a banker who is making commercial real estate loans?  We'll trade you the contents of one banker's business card for a list of 2,000 commercial real estate lenders.  We solicit these guys to refer their turndowns to C-Loans.

 

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Topics: commercial construction loans

How To Close a Commercial Construction Loan

Posted by George Blackburne on Sun, Jul 12, 2015

ConstructionYou are going to love me after this training article.  It's the best one I have ever written, and whether you are a developer or a commercial loan broker, this training is going to make you a ton of money.

Now is a terrific time to originate or obtain a commercial construction loan.  Its particularly easy right now to close deals for the reasons I will outline below.

In this blog article I will teach you exactly how to close a commercial construction loan.  I have assumed that you are complete rookie.  All you have to do is follow the precise steps enumerated below today's funny picture.

But first let me explain why it is so easy to close commercial construction loans right now.  First of all, there has been very little commercial construction for the last nine years.  The world needs new commercial buildings.  

In addition, banks are loaded to the gills with cash right now (almost $3 trillion in excess reserves at the Fed), and commercial construction loans are extremely profitable for the bank.  The bank earns its entire loan fee upfront, but it doesn't have to disburse most of it's loan proceeds for many months.  This supercharges the bank's yield.  Construction loans are also short term.  Banks love-love-love short term loans.

Bottom line:  In a healthy economic climate like today's, banks prefer construction loans to almost all other loan products.

For commercial loan brokers, commercial construction loans are large, therefore so are the loan fees.  And in particular right now, very few commercial loan brokers even know how to originate commercial construction loans.  Most of the experienced commercial loan brokers were either driven out of the business or retired during the Great Recession.  Commercial mortgage brokers:  You have very little competition.

Bottom line:  Commercial construction loans are not that hard for a commercial loan broker to originate.  Just follow the easy steps outlined below.

 

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But how do you close a commercial construction loan?  Its easy.  Just follow these steps:

  1. Start with a local bank.  Construction loans require progress inspections, so the lender needs to be located nearby.  You can find many hungry commercial construction lenders by using C-Loans.com, and C-Loans is free!

  2. Choose your local bank by size.  Small banks (less than $1 billion in assets) make small commercial loans (less than $2 million).  Regional banks ($1B to $10B in assets) make medium-sized loans ($2MM to $8 million).  Money center banks (more than $10B in assets) make the commercial construction loans larger $8 million.

  3. Gather a loan package:  Initially you will need the details on the land purchase - purchase price of the land, down payment, balance owing, value of the land today, and if the borrower claims that the land is worth more than the purchase price, a very convincing explanation of why this is so (the developer assembled three contiguous parcels over several years or he got the land re-zoned or Wal-Mart moved right next door).  You will need a construction cost breakdown, sales projections if this is a "for sale" property or a pro forma operating statement if this will be a rental property, a curriculum vitae or CV (building experience resume) on the developers, a financial statement on each of the developers, photo's of the land, and ideally an architect's rendering.  It's the rare project over $5 million that ever gets financed without an architect's rendering.

  4. Run the deal by prospective lenders over the phone, keeping the identity of the developer and the exact location of the property close to your vest initially.  The first words out of your mouth should be, "Hello, Mr. Banker.  My name is John Jones with Jones Mortgage, and I'd like to run a deal by you.  Did I catch you at a good time?  If not, I'll be happy to call back later."

  5. Some bankers are aggressive.  Some bankers are so"sleepy" as to make it almost a crime for them to collect a salary.  If one bank loan officer blows you off the phone, be sure to call back the next day and speak with a different loan officer at the same bank.  I have closed scores of loans in my time where Loan Officer A at Bank of the Neighborhood turned me down, but Loan Officer B at Bank of the 'Hood later said yes; but wait a day or two before you call the same bank back.

  6. Once your borrower has sent you his initial package (the borrower needs to prove he is serious about this loan by putting in some sweat-effort), and once you have an interested lender lined up, its now time to ask your borrower to sign a Non-Circumvention Agreement.  Unless the developer intended to find out the name of your lender and then go behind your back, he should have no problem signing a short agreement protecting the mortgage broker.

  7. Now its time to prepare your loan package.  Prepare an Executive Loan Summary, attach your pictures and the short stack of documents described above, and save it as a PDF.  Don't know how to create a PDF?  If you enter the loan into C-Loans.com and submit the deal to six commercial construction lenders, you can then - right as you leave C-Loans - press the Create a PDF button and save the PDF we create for you to your desktop.  One click.  Easy-peasy.

  8. Submit your PDF to your interested lender by email.  He will not open it.  Whaaat?  You'll see.  He'll have some BS excuse (the dog ate Hillary's emails), but the truth is that bankers are incredibly... sleepy.  How about that for tact?

  9. Therefore it is essential that you call your banker to confirm receipt of the package.  "Hi, Mr. Banker, John Jones here.  All I'm doing today is calling to confirm receipt of the package.  You did get it, right?  Oh, your email was down, but its up again now?  Great.  You'll read the package tonight?  Wonderful.  I really wasn't calling to bug you (yeah, right... and I'll love you in the morning).  I should call you tomorrow morning?  You got it!"

  10. Don't worry if the banker nit-picks your deal and turns it down.  No problemo.  He is probably just lazy, or his bank has enough commercial construction loans right now.  If a banker really wants to make loans, a few black hairs is NOT going to put him off.

  11. The secret to successful commercial loan placement is to just keep presenting the deal to different bank loan officers (they can even be at the same bank - see above) until you find one in the mood to lend.

  12. Once the lender comes back and shows some serious interest, from there on its merely a matter of fetching and shuttling documents.

  13. At some point in time the banker should issue a term sheet (also known as a conditional commitment letter or loan proposal), which outlines the likely terms of the proposed commercial construction loan and asks for a deposit of $3,000 to $8,000 for third party reports (appraisal, toxic report, title commitment, etc.).

  14. Although a term sheet is NOT binding on the lender, in real life a term sheet means that you are almost certainly going to get the loan.  As long as the third party reports come back okay, you're golden.

  15. That's it.  Easy-peasy.

 

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Do you need a lender who will actually lend at 75% LTV, rather than just boast about it?  Do you need a lender who will allow a negative cash flow?  Do you need a lender who will also look at the borrower's global income - income from salaries, other investments, etc.? Do you need a lender who will allow the seller to carry back a second mortgage? Does your client have a balloon payment coming due on his commercial property? Has your bank offered him a discounted pay-off? Does your borrower have less-than-stellar credit? Is your client's company losing money? Is your borrower a foreign national? Do you need a non-recourse loan? Do you need a commercial loan with no prepayment penalty? Is your client's commercial property partially vacant? Do all of your commercial leases run out in the next 18 months?

 

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Topics: commercial construction loans

Underwriting Commercial Construction Loans

Posted by George Blackburne on Mon, Aug 25, 2014

underwriting loan commercial construction

Today we are going to teach you how to underwrite a $50 million commercial construction loan.  You will learn the six ratios that a bank underwriter will use to determine whether or not to approve your commercial construction loan request, and we are going to do this using understandable, layman's English.

Interesting note:  C-Loans.com recently closed an $18.5 million commercial construction loan on a mixed-use project in Wisconsin.  The lucky broker who brought that deal to C-Loans earned a whopping $92,500 loan fee.  Wow.  I'll betcha that fee paid some bills.  Note to self:  Submit my commercial construction loans through C-Loans.com.

 

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After the commercial real estate meltdown of 2008 and during the Great Recession, commercial banks had a zero appetite for conventional commercial construction loans.  By conventional, I mean non-SBA, non-USDA, and non-EB-5 loans.  In plain English, conventional here means ordinary, garden-variety commercial construction loans.  In an earlier blog post I wrote that conventional commercial construction loan requests were as welcome during the Great Recession as a male stripper at a (hetereosexual) bachelor party.  Ha-ha!

For six long years, there was very little commercial construction in the U.S.  In the meantime, many vacant and neglected commercial buildings have had their water pipes burst during a cold winter, making them essentially now almost worthless.  Other vacant commercial buildings have been vandalized and stripped of their copper wiring.  The roofs of other vacant commercial buildings have leaked, leading to dangerous black mold.  A great many productive commercial buildings became unusable.  They disappeared from the country's stock of available commercial buildings.

At the same time, the population of the U.S. has grown.  Workers are finally getting back to work.  The auto industry in America is booming again, leading to the return of many manufacturing jobs in the Midwest.  Shale oil discoveries have caused a significant migration of workers to North Dakota, Wyoming, Texas, and other oil-patch states.  Many areas of the U.S. now need new commercial buildings.

Therefore the hottest new commercial loan product right now is a conventional commercial construction loan.  And where do you find hundreds of commercial banks hungry to make conventional commercial construction loans?  C-Loans.com.

 

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But how do you know if the commercial construction loan lead in your hand is a hottie or a complete waste of your time?  You need to know how to underwrite commercial construction loans.  This article will serve as a primer.

Conventional commercial construction loans are underwritten using six financial ratios.  The most important of these ratios is the loan-to-cost ratio.  The loan-to-cost ratio must not be confused with the loan-to-value ratio.

The loan-to-cost ratio is the construction loan amount divided by the total cost of the project.  Traditionally this ratio should not exceed 80%.  In other words, the developer is responsible for contributing at least 20% of the total cost of the project - usually in the form of free-and-clear and entitled land, with most of the architectural and engineering costs prepaid for by the developer.  Since many commercial banks are still licking their wounds from the Great Recession, many banks are limiting their loan-to-cost ratios to just 70% to 75%.  This means that the developer must modernly cover 25% to 30% of the total cost of the project.

The next ratio is the loan-to-value ratio.  The loan-to-value ratio on a commercial construction loan request is computed by taking the construction loan amount and dividing it by value of the commercial property, when it is completed and fully-leased.  The bank's appraiser will compute this value for you.  The loan-to-value ratio on a commercial construction loan request should not exceed today around 70% to 75%.

The third ratio to look at when underwriting a commercial construction loan is the debt service coverage ratio.  The debt service coverage ratio is the property's Net Operating Income (NOI), upon completion and leasing, divided by the annual debt service (P&I payments) on the proposed takeout loan.  A takeout loan is just a permanent loan used to pay off a construction loan.  This ratio should exceed 1.25.  The good news is that with interest rates so low today, most commercial properties easily pass this test.

The next ratio to look at when underwriting a commercial construction loan is the profit ratio. The profit ratio is the difference between the fair market value of the property, upon completion and leasing, and the total cost of the project, all divided by the total cost of the project.  What we are trying to determine here is whether the developer stands to earn any profit by building this commercial building.  If not, he might be tempted to just walk away at the first appearance of a cost overrun.  The profit ratio should exceed 20% to 22%.  In other words, the commercial property should be worth at least 20% to 22% more than it costs to build.

 

Apply  For a Commercial Construction Loan

 

The next ratio to look at when underwriting a commercial construction loan is the net-worth-to-loan-size ratio.  The developer's net worth should be at least as large as the construction loan he is requesting.  A guy with a $1.5 million net worth should not be requesting a $6 million commercial construction loan.  This ratio needs to be at least 1.0.

The last ratio to look at when underwriting a commercial construction loan is the debt yield ratio.  The debt yield ratio is a brand new ratio developed after the huge losses in commercial mortgage-backed securities suffered by CMBS bond investors during the Great Recession.  The debt yield ratio is computed by taking the property's net operating income (NOI) and dividing it by the construction loan amount.  This ratio should not be less than 8.5% to 9% today.

Please note that the debt yield ratio is different from the debt service coverage ratio.  It does not look at today's low commercial mortgage interest rates at all.  In fact, this ratio was invented to rein in the excessive leverage that can occur in commercial mortgage finance when interest rates and cap rates are low.

[Editor's note:  This article was updated August 25, 2016]

Do you need a commercial construction loan or any other type of commercial real estate loan?  If so, please click the maroon button below.

 

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Topics: commercial construction loans

When Can a Bridge Lender Make a Commercial Construction Loan?

Posted by George Blackburne on Fri, Apr 19, 2013

I learned something interesting about commercial real estate finance this week.  To understand this important lesson, I need to first provide you with a little background and context.

Most (from the) ground-up commercial construction loans are made by commercial banks.  The reason why is because commercial construction loans require progress inspections and the payment of subcontractors using some sort of voucher system as construction progresses.

After a subcontractor completes some construction work, he typically submits a payment request, known as a voucher.  The developer and/or the general contractor signs off on the voucher, and then the voucher is submitted to the construction lender for payment.  When the construction lender is a local bank, its fairly easy for the loan officer working for the bank to quickly drop by the property to verify that some work was actually done.

So when you think of a construction lender, think of a commercial bank located close to the property being built.  Okay, but what happens if almost every commercial bank in the country is too scared to lend?  Hmmm.  Now it gets a little tougher to build anything.

There is a class of commercial real estate lender that we'll call a mortgage fund.  Some of these mortgage funds are huge, while others are tiny.  You could have a $500 million mortgage fund or just a $2 million mortgage fund.  Obviously the big funds make the big loans, and the small funds make the small loans.

But these mortgage funds of varying size have a number of characteristics in common.  First of all, mortgage funds charge an interest rate that is typically 3% to 8% higher than the bank.  Secondly, mortgage funds like to make short-term bridge loans (1 to 3 years).

Lastly, mortgage funds (bridge lenders) seldom make construction loans.  The reason why is because most mortgage funds are single-office, national lenders.  Therefore, mortgage funds are seldom located close to the property being built.  Most also lack experience in making construction loans, and they are just not set up to administer construction loans.

Okay, so you can imagine my surprise this week when I read in a national commercial real estate magazine about a big mortgage fund that had just funded a $35 million construction loan on a huge, new residential condo project. 

This bridge lender was able to make this new construction loan because it blanketed two other standing commercial properties.  The mortgage fund blanketed a large shopping center and a large office tower owned by the same builder.

So how can you finance new commercial construction in a market where every commercial bank is afraid of its shadow?  The answer is to blanket other property!


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Topics: commercial construction loans

Why Commercial Construction Loans Are So Difficult to Get

Posted by George Blackburne on Sun, Jun 12, 2011

Very few commercial construction loans are being made these commercial constructiondays.  I always figured that it was because the banks were just too darned scared to make new commercial construction loans.  After all, commercial real estate has fallen by 40%, and many commercial banks have suffered immense losses on commercial construction lending.

But not every company in America is losing money.  There are a great many companies tied to agriculture here in the Midwest that are making money hand over fist.  Why aren't they expanding their manufacturing facilities?

A developer buddy explained the problem to me.  A great many companies have enough dough to cover 20% of the construction cost of their new buildings.  Since these companies are also making money, the bank even tentatively approves their commercial construction loan - subject to the appraisal and other third party reports.

The vast majority of new commercial construction loan applications are falling out at the appraisal stage.  Many, if not most, commercial real estate appraisals are coming in at less than 75% of the actual construction cost. 

In order to be financially feasible, a new project should be worth 15% to 20% more than the cost of construction.  That difference is the developer's profit.

The Profit Ratio is the anticipated profit divided by the total cost to build the new building.  Bankers typically require this ratio to be at least 15% to 20%.  If the potential profit is too small, the developer will have little incentive to complete the project if he runs into any sort of cost overrun.  The last thing a bank needs is another half-completed project.

Modernly, not only are banks finding that the deals have no profit in them, but - even worse - the projects are worth, upon completion,  less than 75% of their construction cost.  Not surprisingly, you will see very few commercial construction loans getting funded.

There are still a few commercial banks willing to make new commercial construction loans.  You can submit your commercial loan to 750 hungry commercial lenders using C-Loans.com.

 

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Topics: commercial construction loans