Ways to Finance Commercial Construction Projects

Are you looking for ways to secure funding for commercial construction projects? Depending on your role, financing can mean different things for different commercial property types.

Commercial real estate developers often rely on investors. If you own a business or manage a large organization, the company’s needs can change over time. You’ll need to complete a construction project budget to address future growth.

Regardless, building commercial buildings requires financial resources. Every building comes with a cost based on the commercial property design. The latest buildings are more sophisticated and durable.

Before the project gets off the ground, securing financing is an essential step. Construction costs have increased to almost three times that of pre-Covid. The increase can make or break your plans.

Fortunately, there are ways to secure financing for commercial construction projects. Here’s everything you need to know about financing commercial buildings.

Traditional Commercial Construction Finance Option

In a perfect world, all commercial construction projects get funded through traditional banks. Money is readily available, whether a new building or a commercial leasing build-out. Access to funding extends the feasibility and alleviates the risks of large-scale projects.

Commercial banks, including community banks and credit unions, are a great source for different types of commercial property projects. A traditional bank loan comes with the option of fixed interest rates. You can also extend the repayment period over 25 years.

Banks also offer short-term construction loans. These loans get repaid once the project is completed and sold.

Construction business loans also cover commercial construction equipment and commercial property designs by architects.

SBA-Guaranteed Bank Loans

The most difficult construction business loan is a loan backed by the Small Business Administration (SBA). The federal government backs SBA loans. If you cannot repay the loan, the bank issuing the loan isn’t left holding the bag.

Of course, this means there’s a strenuous process to qualify. It also means the loan process takes longer and will require more paperwork.

There are two types of SBA loans for construction projects.

504 Program

The 504 program is a multi-purpose commercial construction finance loan that allows you to borrow up to $5 million for a single project. However, you can qualify for three loans with a cap of $16.5 million.

Fund uses include:

  • Commercial construction equipment
  • Commercial property design
  • Mechanical, Electrical, and Plumbing Engineers
  • Real Estate

The terms of the loan vary. Loans for commercial construction equipment have a 10-year repayment period, whereas a loan for real estate has a 20-year repayment term.

7(a) Program

The 7(a) program is similar to a 504 program. The repayment terms for equipment are seven years and for other loans 25 years. You can borrow significantly less with a $5 million cap.

Real Estate Crowdfunding

Real estate crowdfunding is the process of receiving funds from multiple investors. It is similar to other platforms that allow people to contribute funds to a common cause. Think of it as a GoFundMe campaign but with more oversight.

This commercial construction finance option relies on multiple investors. You choose whether to offer equity in the project or to make it lending-based.

Equity crowdfunding is for commercial construction where the builder will hold onto the property. The investors receive a return on monthly rents or when units get sold.

For the lending-based model, the borrower must repay the lenders monthly or quarterly with interest.

Hard Money or Private Lenders

Hard money lenders may not be the ideal financing options for some commercial construction projects. However, when it comes to a commercial leasing build-out, it’s worth consideration.

Private investors issue these types of loans. The lender is often a private investor but can also be a friend or colleague. Therefore, the repayment terms aren’t the same as a traditional lender.

Qualifying for a hard money loan comes down to your ability to repay the loan. Don’t be surprised if the repayment period gets tied to your ability to sell or collect on the project soon after completion. The interest rate on the project is also higher than banks.

On the positive side, a hard money loan cuts through the red tape. You won’t have to meet all the requirements of a regular loan. For example, a hard money lender may not require bank statements, a business plan, or other documents.

Another bonus is you’ll get the money much more quickly. Instead of weeks, the lender can get you the funds in days.

Life Insurance Company

With proper financial planning, one can leverage funds from other assets in order to get a larger source of funds than otherwise possible. A little-known secret outside the construction industry is that life insurance companies underwrite commercial construction loans.

Although these companies are more vested in existing properties, some offer construction loans. The terms and conditions are similar to traditional loans.

Use the loans for anything from multifamily units to hotels. Life insurance loans may have a minimum loan amount of $1 million but come with a 30-year loan term.

Capital Campaign

A capital campaign for commercial construction is an option but can take longer than securing a loan. You’re most likely to see churches or other non-profits utilize this option.

The benefit of capital campaigns is the money is donated, so there is no repayment. The downside is your project can take months or years to break ground. The result will significantly impact future projects.

Weigh the pros and cons of a repayment period with interest vs. a debt-free project.

You can also choose a commercial property design that allows you to build in phases. Investors see their money at work, which increases future contributions.

Commercial Construction Financing That Works for You!

Financing construction projects may be a bit more difficult in the current commercial climate. Don’t let this news deter you from moving forward. With these options, you can find financing that fits your project needs. 

We hope the information has you exploring different types of commercial construction finance options. With funding secure, your next step is to locate mechanical, electrical, plumbing, engineers, and design services.

About Pro Engineering:

Pro Engineering has provided mechanical, electrical, and plumbing engineering design services in Orange and San Diego counties since 1995. During this time, we’ve established ourselves as one of Southern California’s best engineering consulting firms.

Our MEP engineering design team can help you prepare required construction documents for city or state submission for permitting. Even after plans are finalized, we continue to make adjustments and revisions per owner request, city plan check requirements, or to meet engineering goals. Projects can move fast, luckily, so can we.

 For more information on how we can assist you with your next commercial construction project, contact us today

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