Commercial Mortgages and Construction Financing

This article will provide some perspectives about why commercial construction funding has become harder to obtain and will discuss possible business finance solutions to consider. The current recessionary circumstances coupled with a shrinkage of capital for commercial mortgage loans in general and construction funding in particular means that it is much more likely that commercial borrowers will have to look beyond their local market area for commercial financing help.

Recent availability of commercial loans has tightened significantly. For several reasons, this has resulted in even more of a shortage of business financing for construction of new commercial property.

Even before commercial finance options became more restrictive during the past few months, construction financing was generally viewed as more "risky" by most lenders. The most significant risk factors for commercial construction finance usually include the following underwriting and funding considerations: (1) potential contractor liens are an added risk not present in commercial financing for existing construction; (2) a commercial property cannot produce revenues for the owner/borrower until the property is completed and occupied; and (3) many construction projects exceed initial cost estimates and/or take more time to complete than originally anticipated. Of these three factors, the risk of potential contractor liens appears to be an even greater concern in the current funding climate for commercial lenders because of the rapidly-deteriorating health of the construction industry.

The unique problems with financing for construction of single-family homes is not addressed in this article. Construction financing for home builders has always been viewed separately by lenders because the eventual owners of single-family homes are individuals rather than businesses. However, the current difficulties seen in residential construction are indirectly impacting the availability of construction funding for commercial properties in general because of the potential for contractor liens incurred during residential projects impacting the financial stability of contractors involved in both kinds of construction activity.

There are some locations throughout the United States which are likely to experience more funding restrictions for commercial mortgages. The viability of real estate investing has exhibited an enduring theme of "location, location and location" to suggest the importance of a specific locale for any investment activity. This is still an important factor when lenders evaluate the prospects for commercial loans involving both existing commercial properties and new construction. A commercial lender is generally looking for stable to growing revenue prospects for a business which will in turn provide support for a stable to growing property value, thus protecting adequate collateral for the business loan.

Today's dilemma faced by commercial lenders is twofold: (1) A severe recession by definition will result in decreasing income for many businesses. (2) Some areas of the country are likely to exhibit more volatility than others. The main point in emphasizing location issues is to demonstrate that the use of non-local lenders can be a viable solution to consider for commercial financing involving both existing properties and new construction.

In some areas of the country, local commercial lenders have stopped virtually all new business financing as well as construction financing. We have published a separate report about how to prepare for the possibility that your banker says "No" when a business requests commercial real estate financing or working capital financing. Of course it will appear even more difficult to a commercial borrower if all local banks are disapproving business financing of all kinds.

To close on a positive note, construction financing for commercial properties is still available for financially-sound projects in most areas of the country. But in such a negative business borrowing climate as we are seeing today, it is more important than ever for small business owners to seek out a commercial loans expert who can discuss the feasibility of obtaining funding help outside of the local lending area.

Working Capital
Working capital financing and business financing strategies.