NEW YORK, NY, October 25, 2017 (PRESS RELEASE JET) — CRE-Finance CEO, Todd Tretsky talks about commercial construction financing. There are two very important terms he discusses: loan to cost and total cost.
The total costs on a commercial construction loan include:
contingency reserve (5% or less)
So, then what is the loan to cost? It is your total cost divided by the construction loan amount, which is then multiplied by 100.
For an example, let’s say a developer in Miami wants to construct an office building. He needs $3.2 million loaned. His total costs are $3.8 million. When we divide 3.2 by 3.8 and multiply it by 100, we then get a cost ratio of 84. This is a little too high for industry standards, and most commercial lenders want to see a ratio of 80% or less because the developer has 20% equity in the project. This puts some skin in the game for them.
The best way to guide a developer to get to the total cost of 20% or more is to have the developer acquire the land. The developer should also have the architectural and engineering plans ready in order to get into a good equity situation.
We have seen people take loans with less than 20% equity, but it’s not terribly common.
Here at CRE we specialize in commercial construction loans, and if you have question please don’t hesitate to contact us.
To learn more and to see if your project qualifies please call the CRE Team at 212-851-6926 or email [email protected] for more information. You can visit CRE-Finance.com to see transactions or fill out an application to get the process started.
CRE-Finance offers customized financial solutions for small, medium and large size businesses. We specialize in debt financing for commercial real estate owners, developers, individuals, business owners and entrepreneurs. CRE-Finance overcomes common financing challenges for its clients and engineers prompt, innovative and reliable finance solutions outside the “bankable box”.
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