Types of Construction Loans

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Developers and investors who purchase underutilized land or run-down properties have special needs due to the financing that is required to get their properties up to speed. Not only must these clients worry about selling, occupying or owning a project, but they must obtain specific financing to make the land, and any buildings on it, habitable.

We're talking about projects that can range from a few thousand dollars to hundreds of millions of dollars in construction financing needs.

 Often a developer will have or locate funding to buy the land outright, then use the land as full or partial collateral for the remaining funds needed.  Commercial development can be very risky, and getting funding can be tricky if the developer and others involved do not have a track record of successful projects.

Sometimes the developers are the owners upon completion and can use other properties they have developed as collateral if there is enough equity in them.  

These are some of the most common types of construction loans.

Land Development Loan
When raw or undeveloped land needs to be made construction-ready a land development loan can be obtained. The raw land may be subdivided and sold as a number of parcels for commercial or residential use. It may also include the installation of sewer, water or power lines to the site.

Acquisition and Development Loan
An A&D loan is appropriate if raw land is ready to be developed, or is already developed but needs improvements to its infrastructure or existing buildings.

The A&D loan usually covers both the purchase of this land and the cost of any improvements needed before the development can be completed.

Mini Perm Loan
This is a temporary loan typically used to settle an outstanding construction or commercial property loan on a project that, once completed, would produce income.

After three to five years of generating income the mini perm loan is replaced with long-term financing. Mini perm loans are normally obtained through commercial banks.

Takeout Loan
A takeout loan can provide permanent financing on projects where a temporary loan, such as a short-term construction loan, currently exists. Many lenders require their developers to secure a takeout loan before a short-term loan can be granted.

Interim Construction Loan
This pays for the labor and materials used to construct a project. An interim construction loan is usually valid for 18 to 36 months, and is settled once a long-term mortgage is in place.

It's a New World with Crowdfunding

This is a whole new ballgame for commercial project financing.  Crowdfunding brings together many smaller investors to pool funds for specific projects.  Doing a Google search on "crowdfunding" yields a number of companies engaged in the business.  They make their money on fees paid by both the investors and the developers.

Instead of approaching established banks for loans, developers can sign up with a crowdfunding platform to raise the required funds.  Investors who otherwise couldn't participate can sometimes get involved for as little as $1,000, though it's usually at least five figures.

 However, even $50,000 to invest would not have allowed someone to get involved in these major projects in the past.  Some of the more well-known companies in crowdfunding include:

There are still hurdles for most wannabe small investors.  Though things are loosening up a bit, most of these opportunities are open only to "Accredited Investors."  Federal Regulations govern who is considered accredited, and there are several qualifying situations, mostly related to net worth and investment knowledge.

The good news is that crowdfunding is growing rapidly and the government is beginning to open up ways for smaller investors without significant net worth to get involved.  It's becoming mainstream, and projects from small office buildings and supermarkets to highrise condominiums are being funded this way.

If you want to brag about owning a piece of the new huge shopping mall in your city, this is the way you may be able to make it happen.