Commercial Construction Financing Assessment Process Ontario

Toronto Mortgage Broker

When looking into construction financing for a commercial project, its going to be important to get a semi accurate assessment of how much financing you can hope to secure before getting to far into the project.

Many times the property owner can start out with assumptions or guidelines related to being able to secure a construction loan that are inaccurate which can create problems completing the work on time and in budget.

So here?s a few things to keep in mind about how a lender undertake a commercial construction financing process.

First, you are better off reviewing, in detail,? your plans and preliminary budgets with relevant construction lending sources prior to spending too much money.

There can be a tendency to make assumptions as to what costs a lender will cover, and what value they will assign to the work completed prior to you speaking with them. If your assumptions turn out to be off by a wide margin, it may become difficult to arrange financing with what you have to work with at that point as it may be difficult to alter the scope of the project for various reasons.

Second, the fundamental basis for approving a construction loan is going to be based on the lender?s opinion of the property value before, during, and immediately after construction. So its going to be important to support property values through third party appraisals at all relevant intervals of the project.

The starting point is always going to be ?what is the land worth today in its as is state?? So if you paid $300,000 for a piece of real estate 60 days ago, its unlikely that a lender will now consider it to be worth any more than that.

Property owners and builders can get overly hung up on getting the budget for the project financed instead of the market value of the end product.

For example, if you have a $5,000,000 construction budget for a project to be erected on a $500,000 piece of property, the starting point would be that a construction lender would consider financing 65% to 70% of the project value.

But what is the project value?

On a cost basis, one can argue that the project value is $5,500,000.

But if we get a qualified appraiser to come up with a post construction value of the property, based on the plans and budgets, the amount can be more or less than $5,500,000.

And there is a real risk of it being less if the scope of the construction work provides building improvements and functionality that are going to be unique to the future tenant(s). A market value appraisal may provide significant discounting of the value associated with a ?non standard construction?, providing a lower baseline that a construction lender will finance from.

Another way of putting this is that a construction financing source will provide up to 65% to 70% of market value of the completed project, to a maximum of the budgeted amount.

Third, any shortfall between what a construction mortgage provider is prepared to advance and your total capital required, is going to have to be invested by the builder in the form of cash or through leveraging of other real estate assets, which is not uncommon and can be an effective solution to make the numbers work.

Once again, its important to have all of this understood before you spend very much money so that the project can be structured within the scope of what can realistically be provided by a construction loan source.

If you have a commercial construction financing requirement for a project you are planning or are in the middle of, I suggest that you give me a call so I can go through your requirements with you and discuss different financing solutions that may be available to you.

Click Here To Speak With Toronto Mortgage Broker Joe Walsh For A Free Assessment Of Your Commercial Construction Financing Options

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