The development of commercial real estate frequently requires large inputs of cash to arrive at a finished property that produces a profit. Idaho developers and investors derive most of their financing from lenders that specialize in commercial properties. Their loan underwriters understand how to analyze the value of a commercial property development. Some of these lenders are banks, but venture capitalists also fund commercial real estate projects.
Short-term financing
Many construction loans cover expenses for certain aspects of the project, like infrastructure development or building renovation. The loans are meant to be paid off within months or a few years. Commercial real estate law guides the structure of these financing arrangements and how to use the land or buildings as collateral.
Types of short-term construction loans:
- Interim construction loan pays expenses as the developer completes one stage of construction and moves to the next stage.
- Acquisition and development loan pays for the purchase of the land and the construction needed to upgrade the property.
- Mini-perm loan pays off existing loans so that the project can continue.
- Land development loan pays for work to make the land ready to build on.
Takeout loan
In commercial construction, a takeout loan describes a longer-term financing agreement. You may have to concurrently get approval for a takeout loan while arranging for one or more short-term funding agreements. The takeout pays off the short-term notes that will come due as the construction reaches various milestones.
Collateral
Lenders want to reduce their risks as much as possible. You may have to secure a construction loan with equity that you already have in the property. You might have equity if you were able to pay cash for the land. Other commercial properties that you own may also serve as collateral for a new construction project.
