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Construction Loans > Commercial Financing and Underwriting Commercial Construction Loans

Commercial Financing and Underwriting Commercial Construction Loans

A Developer Usually Has to Contribute 20% of the Total Cost of a Commercial Project

Suppose a developer wants to build a commercial project, say a large retail center. The commercial construction lender, typically a bank, is not going to cover 100% of the costs and take all of the risk. The developer has to have some skin in the game.

In order to get construction financing on a commercial project, the developer is typically required to cover 20% of the total cost of the project. This contribution often takes the form of equity in the land. Since the land usually represents around 20% of the value of an improved property, the bank usually wants the developer to contribute the land free and clear of any mortgages.

Many times, however, the developer may have a small mortgage on the land, and the developer's equity may take other forms. He may have paid for all of the architectural and engineering work out-of-pocket. His own construction company may have graded the property. Finally, the developer may be required to simply bring cash into the deal at closing. For example, Blackburne & Brown recently approved a $2 million construction loan on a condo project. One of the conditions of this commitment was that the developer had to bring in $250,000 in cash at the closing.

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