Commercial Loans and Fun Blog

Commercial Loans and Underwriting Commercial Construction Loans

Posted by George Blackburne on Sun, Mar 15, 2015

OfficeconstructionA handful of well-trained commercial mortgage brokers are about to make a fortune originating commercial construction loans over the next few years.  There are three reasons why this is true.

  1. There has been almost no new commercial construction in the U.S. for the past eight years.  The U.S. needs a few more commercial buildings in certain areas - like office space in San Francisco and multi-use industrial space in many of the nation's gateway cities (jokingly described as cities with football teams).

  2. Commercial construction loans are large, so the mortgage broker's fee will be large.  One point on a $4 million commercial construction loan is a handsome $40,000.

  3. Banks love to make commercial construction loans because they are very profitable.  The bank earns one point ($40,000) to two points ($80,000) upfront on the entire loan amount (say, $4 million), even though the first draw or disbursement to pay for the demolition and grading might only be for $37,000.  Construction loans are also short-term loans.  Banks greatly prefer short-term loans.

Commercial construction loans can also be an enormous waste of time for mortgage brokers, if you don't know how to quickly separate the wheat from the chaff.  An untrained commercial loan broker could easily originate two dozen large commercial construction loans and never close a deal.

The reason why is because the vast majority of developers don't have enough equity or skin in the game.  They want the bank to take all of the risk.  The problem for beginning and intermediate level commercial mortgage brokers is that they can spend dozens of hours packaging a commercial construction loan, when the deal never had a chance in heck of closing from the start because the deal lacked enough equity.  Over the several blog articles, I intend to teach you how to quickly determine if a commercial construction loan has enough equity.


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If a commercial construction loan does close, it is almost always made by a garden-variety commercial bank.  You'll recall that a commercial bank - as opposed to an investment bank or a merchant bank - is just a bank that accepts deposits and makes business loans.  The word "commercial" is just a fancy term for "business".

Construction loans have to be disbursed in stages; otherwise the developer could just skip town with his Barbie doll girlfriend and the bank's $4 million.  The bank will therefore insist on making frequent progress inspections to ensure that building is being constructed according to the plans and specifications.  Of all of the various types of commercial lenders - life companies, conduits, commercial banks, credit unions, and hard money lenders - commercial banks are the ones best equipped to issue a number of smaller disbursement checks.

Since construction loans need to be disbursed in stages, after frequent progress inspections, it follows that commercial construction loans are made by local banks.  It wouldn't make sense for a Chicago bank to make a $4 million commercial construction loan in Dallas.  You can't keep putting an inspector on a plane to Dallas every ten days.  It's not economically feasible.



Okay, so an $8 million commercial construction loan falls in your lap.  Do you accept the loan brokerage assignment.  Well, let's underwrite the deal.  To underwrite a commercial construction loan, you need to apply a number of tests and ratios.  We will cover each of these tests or ratios in more detail in upcoming blog articles:

  1. Loan-to-Cost Ratio.  Is this deal less than 80% loan-to-cost?  Does the developer have enough skin in the game?  Most deals will fail this test.

  2. Loan-to-Value Ratio.  When completed and leased out (stabilized), will the construction loan be less than 70% to 75% of the property's fair market value?

  3. Debt Service Coverage Ratio.  Will the finished property, when leased out and stabilized, generate enough net operating income to give the takeout lender his required 1.25 debt service coverage ratio?

  4. Debt Yield Ratio.  This ratio is new, and it is different from the debt service coverage ratio.  This ratio is typically only used for commercial loan requests larger than about $5 million to $10 million.  If the borrower defaulted on his first payment and the construction lender immediately foreclosed, will the leased and stabilized property produce a cash-on-cash return to commercial construction lender of at least 8% or higher?

  5. Experience of the developer.  Has the developer built and managed a number of similar buildings almost this large?  Be sure to ask for a curriculum vitae ("CV").

  6. Is the project ready to be financed?  Does the developer have his final working drawings?  Can he show you an architect's rendering?

We will cover each of these subjects in more detail in the coming weeks.  

If you learned something today, would you kindly give me a social media doggie treat, like a Facebook Share, a Linked-In Share, a Twitter Re-Tweet, or a Google-Plus atta-boy?  It's how I can judge whether or not our readers are digging these articles.  Thanks so much!

Got some loan agents working for you or some buddies who are also in commercial brokerage or commercial mortgage brokerage?  It would be terrific if you would please forward this training article to them.  And if someone was indeed kind enough to forward this article to you, you can sign up to receive these free training articles in commercial real estate finance by going to our blog and typing in your email address below my rump-ugly picture.  :-)

Do you need a commercial construction loan right now?  You can submit your application to hundreds of different hungry commercial construction lenders in just four minutes using  We recently closed an $18.5 million commercial construction loan on the mixed use project in Wisconsin seen below.  The mortgage broker who used earned a $92,500 loan fee:




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Topics: commercial construction loan

Big Apartment Construction Loan Just Closed

Posted by George Blackburne on Thu, Jan 6, 2011

Investment Banker Announces Closing of $20.6 Million Deal

There are so few large commercial construction loans that are closing nowadays that a recent closing of a $20.6 million apartment construction loan actually warrants a mention in our blog.

The loan was closed by a large regional bank. The project was a planned 125-unit apartment complex in Studio City, California. The project will be a mix of one-, two- and three-bedroom market rate apartments. Onsite amenities include a swimming pool and sun deck, tennis courts, and a clubhouse.

The construction loan, which represents 72 percent of the total development cost carries an interest rate of Libor + 2.75% with no floor, so the current interest rate is approximately 3.0%.

The mortgage banker that originated this loan sent an announcement of the closing to thousands of real estate brokers and finance executives. Such a closing announcement is called a tombstone. The typical tombstone will contain the contact information of the mortgage company originating the deal, in hopes of generating more leads.

Do you need a commercial construction loan right now? You can submit your mini-app to 750 different commercial lenders in just four minutes using And C-Loans is free!

Topics: commercial construction loan, apartment construction loan

Commercial Construction Loans and the Interest Reserve

Posted by George Blackburne on Mon, Jul 12, 2010

Understanding the Interest Reserve and How to Compute It

Need a commercial construction loan right now? If the loan is larger than $4 million and the collateral is commercial and not residential (sorry, no homes, condo's or apartments), please write to me, George Blackburne, at or call me directly on my cell at 574-360-2486.  We have a terrific bond financing program.

When a developer secures a $2 million commercial construction loan from a bank to build a project, did you know that he starts to make monthly payments the very first month?

"Gee, George, that sounds awful. How can that poor developer afford to make the monthly payments on a $2 million loan when the property isn't built yet and generating rent? Those payments have to be in the range of $14,000 per month!"

It's not as bad as it seems. First of all, commercial construction loans are disbursed in small progress payments. During the early months of the loan, the outstanding balance might only be a few hundred thousand dollars. Secondly, the monthly payments owed to the bank on a commercial construction loan are just interest-only payments based on the outstanding balance. The interest-only monthly payments on an outstanding balance of just $200,000 aren't too bad.

Lastly, the construction loan budget contains an interest reserve to cover the construction period interest. In other words, the monthly loan payments on a commercial construction loan come right out of a little savings account built right into the construction loan budget.

"That sounds much better. But how does the bank know how large of an interest reserve the developer will need?"

One way to compute the interest reserve is for the developer and the bank to build a spreadsheet that lays out when all of the construction loan proceeds are expected to be disbursed. Then, using the spreadsheet, the bank can compute the exact amount of interest that will be needed in the interest reserve.

On smaller commercial construction loans, the bank will use a rule of thumb. Suppose a $2 million commercial construction loan has an estimated term of 1.5 years. During the early months of the loan, only a few thousand dollars will be disbursed. At the latter end of the term, almost all $2 million of the commercial construction loan will be disbursed.

Bankers will therefore assume that on average about half the loan will be disbursed over the 18 months. In this example, half of $2 million commercial construction loan is $1 million.

Therefore, to compute the required interest reserve, the banker will multiply $1 million (the average outstanding loan balance) times 7% per year (the annual interest rate) times 1.5 years (the anticipated term of the commercial construction loan), which equals $105,000.

"Gee, George, that seems simple enough. But what happens if the property takes longer to build or longer to lease than the developer expects?"

The developer is toast. He will have to start making the interest-only payments out of his personal pocket, and if he can't, the bank may decide to foreclose on him immediately. Hey, there's a reason why developers make the big bucks. They take some serious risks.

Need a commercial construction loan right now? If the loan is larger than $4 million and the collateral is commercial and not residential (sorry, no homes, condo's or apartments), please write to me, George Blackburne, at or call me directly on my cell at 574-360-2486. We have a terrific bond financing program.

Topics: commercial construction loan, construction period interest, interest reserve

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

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

SBA 504 Construction Loans

Posted by George Blackburne on Tue, Oct 14, 2008

These Partially-Guaranteed Construction Loans Are Still Getting Done

As a result of current banking crisis, very few commercial construction loans are getting funded. I have warned commercial mortgage brokers extensively, in this blog and on the main C-Loans website, not to waste precious time trying to place commercial construction loans or residential subdivision construction loans. There is one exception to this rule.

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If a commercial property will be 51% owner-used, it is still very possible today to obtain an SBA 504 construction loan. More precisely these loans are known as CDC/504 loans.

Despite the name, these loans are not made by the Small Business Administration. Instead, SBA 504 (CDC/504) loans are made as a conventional first mortgage loans with a piggy-back second mortgage that is recorded concurrently.

The first mortgage is actually made by a conventional lender, typically a bank. The piggy-back second mortgage is also typically the bank or 504 lender for about 45 days, but then the second mortgage is assigned to a Certified Development Corporation and guaranteed by the Small Business Administration.

After the construction period, the underlying conventional construction loan converts to a long term conventional permanent loan. This loan is often fixed for five to ten years and is typically amortized over 25 years. The conventional loan will typically have a term of 10 to 25 years.

The piggy-back second mortgage is always fully-amortized over 20 years and is written at a government-subsidized interest rate about 1.5% lower than the typical conventional commercial first mortgage.

The big advantage of an SBA 504 loan is that the owner only has to contribute 10% of the total cost of the project, including loan fees and other soft costs. The owner can often include some heavy equipment costs in his total project cost, meaning that he gets to buy some heavy equipment at low commercial real estate loan interest rates. In contrast, on a conventional commercial construction loan, the owner usually has to contribute 20% to 35% of the total project cost.

You can apply to 50 SBA 504 lenders using

Topics: CDC/504 loans, CDC loans, Certified Development Company, commercial construction loan, construction loan, SBA 504 loan, SBA loan, small business loan