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What are the requirements for a commercial construction loan?

What are the requirements for a commercial construction loan?

A construction loan is a type of short-term financing to fund a new construction project. If you’re planning to construct a multi-family home, apartment building, high-rise, commercial office building, or another type of large project, you will probably consider obtaining a commercial construction loan.

Commercial construction loans are different from other loans. Most loans are structured so the borrower receives the full amount they are requesting upfront. Then, once the loan is received, the borrower makes payments over a set period of time.

However, with construction loans, the borrower does not receive the full amount upfront. Instead, you’ll work with the lender to create what is known as a draw schedule. This means that you will receive payments from the lender as your project hits new milestones. For example, the first draw might be used for the clearing and developing the land. The next draw you receive may be provided when the foundation is poured and another when the framing is complete, and so on.

construction loan

Typically, a lender will require a confirmation from an inspector that your project has hit each new milestone before releasing the next draw. This process will continue until all milestones have been completed and you have received the full amount.

When you take out a construction loan, you will only pay interest on the portion of the loan proceeds that you have received. Therefore, if the total loan amount is $600,000, but the lender has only lent you $150,000, you will pay interest on the $150,000.

Once the project is done and the full amount is due, what should you do next? Instead of making one large payment, you can look into a commercial mortgage. The property will likely serve as collateral for the mortgage, and you can use the lump sum from the mortgage to pay off the commercial construction loan.

Commercial construction loan process

1. Connect with a lender
Contact a hard money lender or traditional lender to discuss your project and find out what financing guidelines and solutions they have.

2. Commercial construction loan underwriting
After you submit your loan application, the lender will quickly evaluate the application internally to make a decision on whether or not to proceed. During this review, the lender is looking at the project cost, summary projections, underlying assumptions, and background of the developers. If the project is one the lender would like to move forward with, they will sometimes provide you with a loan term sheet. The term sheet typically outlines the terms and conditions of the loan, provided all the information that was provided is accurate and reasonable. Once the term sheet has been reviewed and accepted, the lender will move to full underwriting and approval of the proposed loan.

During the underwriting process, the lender compiles more detailed information about the project. Expect the lender to request building plans, general contractors’ bids, cost projections, construction timelines, etc. It’s also typical for a lender to ask for the borrowers’ tax returns, financial statements, and any other documents that can support the loan request.

One of the biggest differences between a commercial construction loan and investment real estate loan, from an underwriting standpoint, is that a construction loan has no operating history to underwrite. Therefore, the valuation of the property is only based on the real estate pro forma. As for the credit approval process, it’s similar to other commercial loans, but due to the extra risks involved, the development team, general contractor, and market conditions are all reviewed in more depth.

After the loan has been approved, the lender will provide a commitment letter. This is similar to the term sheet but is a legally binding contract, whereas the term sheet is non-binding.

3. Loan agreement and closing
Once you’ve committed, you’ll be provided with a closing checklist which outlines in detail what needs to be completed prior to the loan closing and funding to begin. As mentioned, additional funds are distributed on based on a draw schedule for the costs incurred in each stage.

Typical construction loan rates and requirements

Interest rates and fees vary greatly but generally increase as a direct correlation to leverage or risk. The higher the leverage or risk to the lender, the higher the cost to the borrower. Factors such as borrower creditworthiness, liquidity, and experience, also play into the cost of capital.

  • Conventional Lenders:
    • 3 – 6% interest
    • Fund 50 – 75% of project cost (“Loan-to-cost” or “LTC”)
    • 60 – 90-days to fund, typically
    • Strict financial, experience, and credit requirements, underwrite covenants, and prepayment penalties
    • Usually have additional deposit requirements and concentration limits for markets and asset classes, or for particular borrowers
    • Modifying or changing construction loan terms mid-way through with a traditional lender can be difficult or impossible
  • Private and hard money lenders:
    • 7 – 14% interest
    • 75 – 90%+ LTC, requiring much less cash at closing (“down payments”) to fund than conventional lenders
      • Broadmark Realty Capital, for example, will typically fund between 80 – 90% of project costs and can use the land as equity
    • Much more relaxed liquidity, net worth, experience, and credit requirements
    • 15 – 60-days to fund, typically
      • Broadmark Realty Capital, for example, is able to close within 1-2 weeks on most project types from the time appraisal is received (larger loans may take longer)
    • No deposit requirements and will rarely have covenants
      • Broadmark Realty Capital, for example, rarely underwrites covenants or prepayment penalties and has no deposit requirements

While conventional lenders may have lower interest rates, they also have lower leverage (requiring you to have more cash and equity), more difficult and longer approval and closing processes, and strings attached. Private and hard money lenders have higher interest rates but lend more towards the project’s costs, requiring you to contribute less cash upfront, making loans easier to qualify, faster to close, and have fewer strings attached.

Types of commercial construction loans

There are a few different scenarios in which developers and investors can use commercial construction financing solutions. These include land development, vertical construction, and acquisition and development projects.


Commercial construction loans can become complex and tough to secure. However, understanding how they are evaluated by lenders can help clarify the funding process. Broadmark Realty Capital has specialized in commercial construction loans and real estate development loans since 2010. Whether you’re looking for financing or have questions, call one of our loan specialists today!

Multifamily Real Estate Investing

Multifamily Real Estate Investing

Investing in multifamily properties is a great option for those looking to get into real estate investing and feel comfortable with the responsibility and time commitment. Done right, they can be a great source of passive income. However, it’s important to have an in-depth understanding of how to find properties that will provide worthwhile returns on your investment, and subsequently acquire them. Crunching the numbers instead of being influenced by extraneous factors will quickly give you comprehensive insight into an overall project.

multifamily investment financing

What is multifamily housing?

A multifamily property is any residential property that consists of more than one housing unit and allows more than one family to live separately. Duplexes, triplexes, townhomes, apartment complexes, and condominiums are all examples of multifamily properties. Buildings with more than four units are considered commercial properties.

As the owner of a multifamily asset, you can either live in one of the units and rent out the others or live in a different property and rent them all out. If you live in one of the units, the building is considered an owner-occupied property. If you don’t live on-site, you’re considered an investor. This is important to know because the rules for obtaining a loan or mortgage are different for occupying owners and investors.

Real estate financing options for multifamily investments

Financing options for multifamily housing investments include cash financing, hard money lenders, banks, seller financing, and peer-to-peer lending. Generally speaking, every opportunity will be different, and which financing route you choose will depend on your timeline, your financial situation, and other factors. As mentioned previously, if you choose to live in one of the units while renting out the others, your property would be considered owner-occupied. This means that when you’re looking for financing options, the second unit’s income will be factored into the lender’s qualifying factors and may make it harder to find a loan.

How to buy multifamily properties

Much like purchasing a single-family home, there are real estate websites such as that allow you to filter results for the type of property you are looking for. Another option is to work with a real estate agent who specializes in multifamily housing. They may have a greater understanding of opportunities in your area and even some that have not yet hit the market. If you’re looking to invest in a duplex, triplex, apartment building, or condominium complex, you can begin your search with this checklist:

  • Location: Location is one of the most important factors for real estate investors, particularly for multi-family properties. You should choose an area with high employment, well-maintained neighborhoods, population growth, and where housing is in high demand.
  • Number of units: Evaluate the property as a whole. Investors should consider the number of units in the property, including the number of rooms in each unit. If you’re a beginner, we recommend beginning your real estate search with three types of multifamily properties: duplexes (two units), triplexes (three units), or four-plexes (four units). Typically, these properties have the most upside with the least amount of risk.
  • Potential income: The next step is to determine how much income a property can generate. There are websites such as Rentometer.comZillow, and that let you analyze rental rates based on the size and location of your property. If you’re looking to remain conservative, you can use the 50 percent rule. As the name suggests, you should estimate your operating expenses to be 50 percent of the gross income. So, if a rental property makes $40,000 per year in gross rents, you should assume $20,000 would go towards expenses. This does not include the mortgage payment.

multifamily property financing

The benefits of multifamily investing

Some benefits you can expect when investing in a multifamily property and which will make your investment worthwhile include:

  • Greater cash flow: Unlike single-family properties, which generate one source of monthly income, multifamily properties draw rents from multiple units.
  • Less risk: When investing in single-family rentals, income is lost when the home is vacant. However, because multifamily properties have numerous units, you can offset the loss of income from one vacant unit with the income from others.
  • Taxes: You can make more income by renting to multiple tenants while only paying taxes on one building. You can also write off some of your home maintenance as a business expense and prorate part of your mortgage interest payments.
  • Scalability: With multifamily investments, the multiple units involved count as multiple properties instead of a single-family home representing one property. It’s a great step towards growing your real estate investment portfolio and possibly venturing into mixed-use and/or larger apartment properties.

The challenges of multifamily investments

Despite all the benefits of investing in multifamily properties, there are some downsides, which include the following:

  • Multiple units = higher cost: Multifamily investment properties usually cost more upfront. You also need to factor in the maintenance costs of multiple units.
  • Being a landlord: Finding and managing tenants is a time commitment. If you live near your tenants, you may get knocks on your door throughout the day with maintenance-related questions. And you’ll need to feel comfortable screening and negotiating lease terms with your tenants.
  • Selling the property: It can be more complicated to sell a multifamily property that has tenants because you’ll have to coordinate showings and appraisals.

multifamily investment

Setting yourself up for success

On top of the considerations we’ve outlined, does the property allow for a healthy return on your investment—in terms of both time and capital—or is it a deal that’s too good to be true? Performing your own due diligence is critical to determining which properties will allow you to extract the most value. Additionally, knowing when to say no to a deal is just as important as knowing which projects are worth it.

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.