• Colin Dubel

Constructions Loans for California Commercial Real Estate

HARBORWEST provides tailored commercial construction programs to both our developer clients for investment properties, and business owner clients for owner-user properties. This can be both on a ground-up construction basis, or major renovation / value-add basis. The below can serve as a guideline, but please do contact us for a customized review of your project to determine you most competitive loan option(s) and potential hurdles to the deal.


There are two (2) primary types of commercial construction lenders – commercial banks and private investors / debt funds. The strength of the loan request determines which funding bucket is more appropriate.

BANK LENDERS are going to have more attractive terms but are going to be more conservative on their projects and qualification. LTC is typically up to 75%, LTV up to 70%, interest rate between 4.50% - 5.50%, 1 point lender fee (+1-point broker fee), full recourse, with strong requirements for both the sponsor(s), contractor and projected pro-forma.

PRIVATE LENDERS will be more relaxed but are going to require higher rates/fees to compensate for the risk. LTC is typically up to 90%, LTV up to 75%, interest rate between 6.00% - 10.00%, 2-point lender fee (+1-point broker fee), full and non-recourse, with more lenient requirements for the sponsor(s), while still having strict requirements for the contractor and pro-forma.


Commercial loan structure can vary by the type of lender, and assessment of strength/risk of the deal by that lender. Below however is a general overview to use as a rule-of-thumb.

· Loan-to-Cost (LTC) – Cost includes the total of all hard costs, soft costs, acquisition costs and sometimes carrying costs. Bank lenders typically will lend a maximum of 75% LTC and private lenders up to 90% LTC. This means that the client will need to have 10-25% minimum equity (skin-in-the-game) and be fully dispersed of those funds before the lender’s portion will kick in to fund the remainder.

· Loan-to-Value (LTV) – The projected value will be determined by an appraiser on an “as-complete” value report which considers the estimated property value once construction is complete and leased up at market rents. Lenders usually are at a maximum 70% LTV to help ensure the “take-out loan” that pays off the construction loan is feasible since most permanent programs are no higher than 65-75% LTV.

· Loan Term – Loan terms are typically 12-24 months with 6-month extension options (fee charged) built into the deal. Interest rate discounts are available for shorter term periods.

· Interest Rates – Construction financing with bank lenders range from 4.50% - 5.50% right now, while private lenders range between 6.00% - 10.00%. This is always interest only, and none of the mortgage principal is paid down until fully paid off.

· Interest Reserve – It is extremely common to build in an “interest reserve” into a construction loan. This means that interest is only charged as drawn, and it’s treated more as a line of credit rather than a mortgage note. As you request more funds from the lender, your balance increases and the interest on that balance accumulates. The interest charged accrues and is “tacked on” to the balance to be paid off upon property sale or refinance.

· Loan Fees – Construction loans are commonly 1% (1 point) fee with bank lenders, and 2% (2 points) fee with private lenders, with a 1% brokerage fee. Fees can be more or less depending on the deal strength, but this is a good expectation for your pro-forma. Clients are also responsible for lender processing, lender legal fees (if applicable), and any third-party reports such as an as-complete appraisal or land environmental report.

· Payment Draws – Lenders will begin providing loan funds once the client is “fully disbursed”, meaning they’ve satisfied their minimum equity injection for the lender. The number of draws allowed depends on the lender and can range from once per quarter maximum to unlimited. Upon each draw request, an inspector will do a physical site visit and approve receipts for the completed work before approving the draw funds. Probably the most common misunderstanding in construction financing, is that most draws are setup as reimbursements, which means you need to pay the contractor fees and hard costs first, then request reimbursement for those spent costs.


Financing is usually the last piece of the construction puzzle. Potential lenders will require the remaining pieces to be in place before they can review the loan request to quote. This can sometimes seem very risky to a developer contemplating a potential land or property purchase, should financing not be available for the construction. Speculative deals like this require an experienced client, extended escrows for proper due diligence, and a strong personal balance sheet to hold its own against the risk.

Clients will want to secure and organize the following documents, prior to submitting for formal construction financing quotes with lenders:

· ARCHITECT – completed drawings and rendering for the as-completed project

· CONTRACTOR – contractor’s full project budget, resume, completed projects

· CITY DEPARTMENT – Building permit approvals for the proposed project

· SPONSOR(S) – Personal balance sheet, tax returns, credit, and resume

· PROPERTY – Pro-forma income statement, rent survey, take-out analysis

Please contact our team at info@hwclending.com to request a complimentary analysis and loan quote on your commercial property. We look forward to hearing from you!

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