Commercial Loans Blog

Recovery Zone Facility Bonds

Posted by George Blackburne on Sun, May 30, 2010

Construction Loans for Large Commercial Projects

Bond financing is the best way to finance the construction of large commercial projects today. Most commercial banks just are too scared right now to make large commercial construction loans.

In order to qualify for bond financing, the project must be commercial in nature. Bond financing cannot be used to build or finish residential subdivisions, residential condo projects, or multifamily projects. Mixed used projects - apartments over retail - may qualify if more than 20% of projected income is from non-residential sources, such a commercial rental income, laundry income, and vending income.

A bond attorney must eventually draft a very intensive set of trust documents, so bond financing is economically infeasible for construction projects of less than $4 million.

Bond financing is a little cheaper than a conventional commercial construction loan. The bonds are typically issued for 30 years at a fixed rate. If the project qualifies for tax-exempt status, the rate will probably be between 6.25% and 6.75% today. Commercial construction loans cash flow very well at only 6.50%.

A lot of developers are surprised to learn that they can now issue tax-exempt bonds. These bonds are not issued by any city, county or state. These bonds are actually issued by the developer. How is this possible?

A private developer can only issue tax-exempt bonds if he can secure a precious allotment of the right to issue tax-exempt bonds made available by the Federal economic stimulus bill of 2009. It's all about securing one of these precious allotments.

Developers are also pleasantly surprised to learn that no credit-enhancement is required. These bonds are welcomed by a hungry market of municipal bond buyers, even though the bonds are unrated. The reason why is because many savvy municipal bond investors no longer trust the good faith and credit of most states, counties and cities.

While the low interest rates on these bond deals are great, what's even greater is that finally developers can get their large commercial construction projects financed. If a developer is depending on a bank to make a large commercial construction loan today, it is very unlikely that his deal will ever get funded.

Bond refinancing cannot be used to refinance existing commercial projects. The proceeds must be used for new construction or extensive renovation.

Are you seeking bond financing for a large commercial construction project? Please call me, George Blackburne, at 574-360-2486 or email me at [email protected].

Topics: commercial construction loan, bond financing, facility bond, recovery zone facility bond