The commercial financing process can be complex for first time borrowers. Commercial mortgages usually have stringent underwriting procedures. Understanding how lenders process and analyze commercial developments and loans can help make this aspect of the transaction easier to navigate.
Submitting a Loan Application
Like a residential loan, the first step is to submit a loan request with a lender. The developer can request a loan for either short or long-term financing. A short-term loan is used to cover construction and the lease up phase (the time during which the project attempts to achieve a desired occupancy level) while long term financing supplants the construction loan once the project achieves market-level occupancy. The bank can also provide a combined loan for these two phases that offers a shorter permanent financing phase.
The Underwriting Process
If the loan application is approved by the bank, the lender can initiate the underwriting process. This entails a thorough evaluation of the financial aspects of the project including a proforma, budget, an analysis of the market, and disclosure of any risks that the loan presents. All the documents relevant to the loan are submitted and reviewed at this time. This includes financial statements, borrower and guarantor tax returns, contingent liabilities, project plans and expenses, engineering reports and any other documentation related to the development.
Distinctions in Commercial Construction Loans
Commercial construction loans have some unique features as opposed to other investment loans. In a commercial construction loan, the lenders are being asked to underwrite the loan based only on cash flow projections. In contrast, an investment in an existing property requires analysis and underwriting of the operating history. Also, additional factors must be taken into consideration by a construction lender such as the market conditions at the time of the loan and the personnel managing the construction.
Loan Approval and Closing
Once the loan is approved, the closing process begins. Due to the complexity of these types of deals, the closing is handled by the lender’s and borrower’s attorneys and includes a substantial amount of documentation. When the closing is complete, the lender’s administration department is responsible for the mechanics of funding the loan according to the agreement and based on the periodic funding requests of the developer.
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