Navigating Commercial Construction Financing

Today, the development and construction of commercial facilities entails a wider range of financial options than anytime in the past quarter century.

Thanks in large part to continued low interest rates and significant liquidity in lending institutions, financing of well-considered speculative projects is available. Having learned the lessons of the tumultuous 1980s, however, such financing is generally considered conservative and follows the precepts of responsible investment. These precepts include significant borrower equity and responsible management available to sponsor the debt.

From a financing perspective, development of commercial facilities falls into two general categories: owner occupied facilities, and investment facilities. The latter can be speculative for lease, include some pre-leasing, or it can be a wholly-occupied build-to-suit project.

Financing of owner occupied facilities typically involves commercial banks and similar short term lenders and entails rather standard pro forma proposals that enumerate the market scope, past performance, revenues, capital costs, and potential for future expansion. Since the owner occupant has business cash flow it is easy to determine his ability to repay. Responsibly generated, those numbers will reveal whether and how much an enterprise can afford to build.
In an effort to nurture small businesses, the U.S. Small Business Administration offers a highly advantageous SBA-504 loan program aimed at small business owners who want to develop or acquire their own facilities.

SBA-504 loans are not as well known as conventional financing, although the benefits they offer to the business owner are enormous and significant. SBA-504s require a skill set most commercial banks offer but usually reserve for portfolio transactions that are of greater benefit to them as a lending institution. Mercantile Commercial Capital, which focuses on SBA-504 loans almost exclusively, rose quickly to prominence based on superior skills, dedication and services only enhanced by the severe dearth of SBA-504 specialized lenders in Florida.

SBA-504s offer business owners below market interest rates with a capital investment of as low as 10 percent of project costs. That advantage, of course, frees valuable capital for business operations and substantially reduces the risk to the business owner. Typical commercial loans require at least 20 percent capitalization -- the amount the business owner contributes. In addition, terms range from 20 to 25 years with the SBA rate fixed for the life of the term.

SBA-504s can be used to finance development and construction of new facilities or acquisition of existing facilities in the $500,000 to $6 million range.

Development of for-lease facilities entails a larger set of requirements and developer commitments. Measuring the feasibility of an owner-occupied facility is much more reliable than assessing the market, distributing risk and determining feasibility for a "for-lease" facility.

"Capital", in this case, is the money that owners or developers contribute toward land acquisition, planning, development, construction and marketing a project. "Financing" is the money that the developers borrow to leverage that capital.

Institutional lenders, such as insurance companies, do not typically finance construction unless they are equity participants. Construction financing is typically the purview of savings and loans, commercial banks or similar financial intermediaries.

Construction loans typically cover costs during the time it takes to build the project and get it leased up. After that, permanent lenders -- including insurance companies -- should come into play for those projects large enough to get on their radar screen. The name of the game is interest rates. The object is to lock in lowest interest rate. In low rate markets the developer will want to complete construction and establish cash flow as quickly as possible to move to the permanent market. In high interest rate markets, the developer may want the construction lender to provide mini-perm financing, typically one to three years until a lower rate environment presents itself.

In many instances, a strong developer can convince an insurance company to provide a forward commitment. Construction is financed by a typical commercial lender, and the forward commitment will "take out" the bank once construction is completed and leasing occupancy has reached a certain level. Management of this process requires an understanding of the likely movement in interest rates.

Large-scale, phased projects offer the opportunity to secure construction financing from institutional lenders based on the phased project performance. If leasing activities in the first two phases clearly demonstrate demand by the time development of a third phase starts, an insurance company may step in and fund all three phases, putting third phase construction money in escrow. The insurance lender relies on the fact that leasing revenues in the first two phases are adequate to serve the debt. The obvious advantage of this strategy is to lock in today's interest rates.

Pension funds use generally the same standards, although pension fund managers will occasionally take on a little more risk. However, one must remember insurance companies and pension funds want stable income. Permanent lenders underwrite underlying leases and the strength of the real estate transaction. They have cash flow needs and the stability of their income is paramount to meeting their obligations.

Commercial Construction Costs - The Importance Of Planning

When designing, planning as well as constructing a commercial property the costs involved are of paramount importance. Unfortunately this is even more true today than it was 10 years ago for the simple fact prices of materials etc., are continually increasing. However a great way of ensuring that the costs are kept to a minimum during any project is through using a commercial construction costs management service.

This is an establishment which is able to realistically look at the capital costs for any commercial construction project. They not only look closely at the planning costs but also cost control services. Plus this service will also ensure that the bids provided on the construction project are documented as well as being completed within the pre-arranged framework of costs and time. They will also look at finding the most economical ways of ensuring that the project does not run over budget.

Each construction project should employ an independent and professional cost manager or quantity surveyor who can police as well as have a clear overview of everything that is going on in order to protect the financial interests of the person who is having the construction project done. Generally these people will use their engineering judgment and experience which they then apply to scientific principles and techniques to allow them to analyze and develop the best action that should be taken in order to provide a good estimation of the costs involved as well as being able to control the commercial construction costs once the project starts on site.

By using a good set of cost management principles the cost manager or quantity surveyor will ensure that the construction project stays within the budget limits and still meets performance and quality targets.

In fact when a commercial construction project is being prepared the cost manager or quantity surveyor is an integral part of the team and can bring added value to any construction and design team.

However if there are any problems relating to commercial construction costs especially if they exceed the budget then this may well cause problems for the person who was asked to control the costs initially.

Commercial Mortgage Loans - Want a Commercial Construction Loan? Go Green!

Like it or not, environmentally conscious, or "green" principles have come to dominate the field of commercial real estate development and commercial mortgage lending. Green building and sustainable design are now the standard in new commercial construction and residential developments. And, with local and national governments getting greener all the time, look for energy and resource efficiency to become mandatory, with green mandates being placed directly into building codes. Funding sources such-as banks, Wall Street brokers, insurance companies and hedge funds, are following suite and these principles are rapidly becoming a part of the commercial mortgage industry.

The US Department of Energy's Center for Sustainable Development recently reported that 40% of the entire world's energy supply is used by buildings. That's a huge number. And, in the United States, construction accounts for our largest manufacturing sector, representing a staggering 13% of US GDP and nearly 50% of total wealth creation. Even tiny percentage gains in efficiency can amount to massive over-all energy savings.

Both institutional and private lenders as well as the REIT, (Real Estate Investment Trust) hedge fund and private equity industries have all embraced the environmental building movement. Green is the color of money and green is the color of commercial mortgage construction lending now into the future.

Lenders love green construction because good for profits as-well-as being good for the planet. Energy costs money, resources cost money and cleaning up messes' costs money. Saving energy, saving resources and sustaining a site all save money, during construction and throughout the operational life of the property. Lenders know that green means efficient and, when they evaluate a project for financing they want to be assured that the funds they invest will be used cost-effectively and that the building will be economically viable.

Environmentally sound buildings can cost substantially less to operate than comparable buildings that disregard such efficiencies and tenants and their clients report higher customer satisfaction rates when doing business in them. To a lender, whose capital is secured by the building, this translates into higher quality collateral and makes their investments more secure.

As a commercial real estate investment banking professional, I can attest to the fact that developers who choose designs that are not green will find it very difficult to raise capital or secure loan approvals for their projects. We are in the midst of a sever liquidity crisis; construction money is in short supply. Lenders are giving priority to green development leaving very little capital available for conventional construction.

The Federal Government's LEED (Leadership in Energy & Environmental Design) rating system awards silver, gold and platinum certification to buildings that reduce waste and save energy and lower costs. LEED certification is almost (although not officially) a mandatory requirement in-order-to get a big construction project funded today.

Being green is no longer just the passion of the activist anymore; it is the new emerging standard in commercial construction as-well-as commercial real estate finance. Investors and developers who need commercial mortgages will do well to pay attention to this trend.

MasterPlan Capital LLC - Commercial Real Estate Investment Bankers

Commercial Construction - Thoughts on Tilt-Up Truck Wash Concrete Structures

The cost of materials is always a huge consideration when building any commercial building, and it is hard to beat a concrete tilt-up structure these days for cost and labor savings. Once the foundation is in place it is pretty easy to pour the concrete into molds and then hoist them up and set them in place with steel anchors. In the Truck Wash sector this is often the favored way to build structures and the largest truck wash chain in the United States does them this way.

Although you still can find steel buildings and structures for truck washes and often, they do okay even with the chemical use in the soaps and detergents used. And yes, there are issues with rust and corrosion. If you ever look over a truck wash that is 10 or more years old, you will see iron oxide streaks down the sides and corrosion. Nevertheless, these buildings do work well also.

Is it more of a matter of preference? Well, some would say yes, and if you can get a really good deal on a steel building then it does make a nice option. But do not forget the costs. It takes a lot of steel to build a 90-foot long building that is 60 feet on the side with three bays and steel prices are horrendous these days. Weather is also an issue with steel buildings and if you have lightning and tornadoes, well, you need to be thinking here.

The availability of concrete is also a key factor on price. Both steel buildings and concrete buildings are fairly quick to build so much is about up-front cost, re-sale value and how the local planning commission feels about it based on their zoning and norms. Both steel buildings and concrete structures enjoy similar depreciation schedules, so again, think about your preferences, weather and cost, and continued success

Steel Fabricator Outlines Multi-Step Approach to Faster Commercial Construction

In today's tight economy, it's more important than ever for the construction industry to operate in a cost-effective way. To cut back on costs and enhance productivity, leading players in the sector are increasingly adopting the fast-track, or design-build construction model. This method consolidates the lengthy traditional scheduling method by operating and launching the design and building processes essentially at the same time rather than one before the other.

While the fast-track method has many benefits, poor initial planning may result in design holes and costly changes as the project progresses. Both of these problems may cause the approach to backfire and can result in disputes and delay scheduling. It is therefore vital to partner with the right steel fabricator in order to obtain realistic cost estimates instead of overly low initial bids that have little legitimate backing.

According to Stone Bridge Iron & Steel, a metal fabrication company in upstate New York, communication and early involvement by subcontractors are key ingredients in saving money and staying ahead of schedule. On its web site, StonebridgeIron.com, the steel fabricator outlines a multi-step "early involvement" system for controlling costs and saving time during fast-track building projects. It includes the following objectives:

Early Communication
Before any action is taken, all stakeholders involved in the project should meet and discuss every element that could possibly affect costs and scheduling.

Early Constraint Identification
It is important to note upfront any knowledge of owner restrictions such as changing tenant requirements and late decisions.

Early Sequence Planning
Develop a timeline and outline every step of the project's schedule. This should be approached from both a decision-making and framework erection outlook.

Early Design Planning
Immediately identify any design holes and their sources in order to develop a cushion of allowances. Review the allotted allowances with stakeholders in order to avoid discrepancies further down the road.

Early Design Communication
Save substantial time and money by meeting with designers to develop a plan of attack for addressing and successfully smoothing out the design holes.

Early Time Management
Prioritize all needed changes and decisions by weighing each task's importance and time sensitivity.

Early Expectations For Change
Dedicate more time on areas with potential changes and over-design for adjustments in weight and location of mechanical.

Stone Bridge Iron & Steel, an experienced structural steel fabricator since 1973, explains that by following each of these eight procedures, a month or more can be shaved off of a construction project's completion time. Not only does this unique method facilitate the process by reducing conflict, but it also reduces considerable business opportunity costs by completing the work earlier than it would be possible with more traditional methods such as the "hard-bid" construction process.

Commercial Construction - Vertical Malls in Los Angeles - Will Developers Achieve ROI?

On the West Side of Los Angeles high-density apartments and commercial buildings are being planned. Some locals decry the density stating it will do nothing but add to the already insane traffic causing total grid-lock. Still, developers have the green light now and are going ahead with things. A few opponents of the project are already making signs; "Tear Down this Mall!"

If you look at the high-rise apartments in Florida, New York, San Francisco, Boston, Seattle and elsewhere you do not see outrageous traffic, instead these units are being built in a way that everything you need is within walking distance, so you really do not even need a car at that point.

In Los Angeles some ambitious and aggressive developers, veteran commercial builders are going for a vertical mall. Yes a mall that goes straight up, seven stories. And it's not that it has not been done before, but for LA it's something new. The project will be completed circa 2011 and has the Red Line Subway running underneath it. There will be 100 stores in this mall and a super-plex movie theatre.

Retail all the way up with restaurants and food courts on top. Many urban planners are carefully watching this development and other similar projects are being submitted around the country, question is will this work in LA? Some say no, others say; why not? It will bring good retailing jobs and there are high-rise apartments already nearby, and with the Red Line below folks can get to work by walking or taking the subway.

There is a lot of wealth in the Wilshire Corridor, surely enough to support the mall, but will shoppers come in droves and if they do what traffic will that bring to the already over congested area? This will be very interesting indeed, this is one commercial construction project everyone will be watching and no matter what the predictions on its success, only time will tell.

Commercial Construction - Efficiency in Business Starts with Energy-Efficient Buildings

Every Dollar Saved is a Dollar Earned as they say. Indeed, it would be hard for any CFO or Accountant to dismiss this notion. Therefore, every increase in efficiency in a business that saves money, is like money in the bank. The Department of Energy, the construction industry and America's corporate manufacturers are looking for ways to save energy, reduce pollution and keep more of what they make. By doing this it gives an edge to the manufacturing sector so they can compete with foreign competition, while reducing energy costs and pollution.

It is a WIN-WIN for everyone and all the parties involved are doing everything they can to increase productivity workflow, streamline the manufacturing process and reduce costs using advanced clean and green technologies to do just that. In fact, if you think about it, this is exactly what the residential home builders are doing in order to stay in business. They know energy efficient homes are more desirable to the few new-home homebuyers currently in the market. It is a matter of cost control and high-tech innovations that is needed to compete. I believe this recent DOE-Department of Energy press-release speaks to this realization:

Energy Star Commercial Buildings and Plants on the RiseWhile green and efficient homes are drawing considerable interest in the building industry, the number of energy-efficient commercial buildings and manufacturing plants is also growing, with a 25% increase last year in the number of such buildings earning the Energy Star.

In 2007 alone, more than 1,400 commercial buildings and plants earned the Energy Star label, bringing the total to nearly 4,100, with Energy Star buildings located in every state, according to the U.S. Environmental Protection Agency (EPA). Energy Star is a joint program of DOE and the EPA, and commercial buildings that have earned the Energy Star use nearly 40% less energy than average buildings, producing 35% lower carbon dioxide emissions. About 500 of the Energy Star buildings use 50% less energy than average buildings. Energy use in commercial buildings and manufacturing plants accounts for nearly 50% of energy consumption nationwide.

The Energy Star buildings include about 1,500 office buildings, 1,300 supermarkets, 820 K-12 schools, and 250 hotels. In addition, more than 185 banks, financial centers, hospitals, courthouses, warehouses, dormitories, and big-box retail buildings have also earned the Energy Star.

More than 35 plants that are manufacturing automobiles, cement, and ethanol have also earned the Energy Star, including for the first time three petroleum refineries in Louisiana and one each in Minnesota, Montana, Ohio, and Texas. In total, these award-winning commercial buildings and manufacturing plants have saved nearly $1.5 billion annually in energy while avoiding 25 billion pounds in carbon dioxide emissions.

What this is telling the American People is the more efficient homes are indeed, on their way. Wouldn't it be wonderful if everyone lived in an efficient eco-home? Well, that is the DOE, EPA and National Homebuilder's Associations plan and what a plan indeed. Think on this. Not long ago our Online Think Tank also took a look at ways to modernize manufacturing facilities and give them an energy savings boost. We must consider ways to improve commercial construction and the manufacturing processes inside.

Commercial Construction is Slow For Now

In most regions of the US Commercial Construction is slow, however there are new schools being built, infrastructure and some LEED Certified strip malls, business buildings and shopping centers. Unfortunately, at the same time there are older shopping centers where the anchor tenants have moved out and the small businesses are left holding the bag to run out their ten-year leases, most will not survive. Many of these are franchised outlets where folks have invested a half-a-million dollars or more in their businesses.

Tenant Improvement is also slow right now as few businesses are starting right now due to economic conditions. Many of the larger projects are long-term and may take a year or more to complete and they are well financed, meaning they do not need to produce a significant ROI for quite a while and plan to take advantage of the up business cycle, which always followers the downturns like the one we are experiencing now.

It would stand to reason that the commercial real estate sector will be first to return to normal, far before the residential housing sector. Of course, some are calling out; Doom and Gloom, for instance the Commercial Real Estate Brokers at their annual association meeting in Chicago in late September of 2008, yet some like Mr. Sam Zell warned that; last year they said everything was great and would recovery; it tanked. So maybe we cannot trust the analyst's forecasts in the commercial real estate a leasing sector?

Expect things to be a bit tough in the first few quarters of 2009 for the commercial construction sector, but as empty buildings get leased and business expansion occurs, it will recovery nicely. Whereas, you can expect residential real estate markets and new home construction to be very slow for 11 months as inventory soaks up, before any major building of tracts hits the scene. Hopefully, this brief overview will get you thinking.

Renting a Dumpster For Commercial Construction Projects

With any commercial construction project, a certain amount of refuse removal and clean-up will be necessary. Whether you are building from the ground up or doing only part of the demolition or construction, you will need an effective and cost-efficient way to clean up the work site. Although it is possible to hire a company to clean up the mess for you, the best option may be to rent a dumpster so you can clean as you go.

Renting large waste receptacles is a fairly straightforward process. Most dumpster rental companies can give you clear guidelines on the types and amounts of debris that can be contained in their units based on the parameters of your project.

For example, if you are breaking ground on a new commercial project that requires clearing large amounts of brush, vegetation and other organic material, you may need to keep this separate from other types of construction waste. Most dumpster rental companies have contracts with landfills that require them to separate the different types of waste materials for disposal or recycling.

When breaking up pavement, driveways or foundations of buildings made mostly of concrete, there are often restrictions on what can go into the dumpster with the concrete. Metal such as rebar may not be allowed, so be sure to check with the rental company first. For general construction that includes waste such as sheetrock, wood, insulation and flooring, you'll also want to double-check with the rental company if you need to dispose of carpeting. In some cases, this is not allowed.

Estimating the size of the unit you should rent requires you to have an idea of the amount of waste that is likely to be generated during your project. Your dumpster rental company will be able to assist you in determining your needs. When calculating the size of the unit in terms of how much it will hold, considering how you will get the waste into the container is also important. If the sides of the unit are too tall for you or your equipment to reach, it will be useless to you. However, some taller containers may allow ground level access via a drop-down door at one end.

It's a good idea to read your rental contract carefully to ensure that you will be able to adhere to its guidelines. Most contracts are for a certain number of days, and they define the maximum weight of waste allowed. Should you retain the unit for a longer time or exceed this weight limit, extra charges are likely to be incurred.

Keeping a commercial construction site clean and organized is made easier by having the proper place to dispose of waste. Often, the most convenient solution is to rent a dumpster suited to the needs of your project.

Commercial Construction Loans

Commercial construction loans are loans aimed at building of a profitable business or corporation. The expansion of existing businesses or industries can also be achieved through commercial construction loans.

When someone considers starting a profitable business or expanding his existing one, one option to achieve his goals is to apply for such a loan. The benefits, terms, and rates are very different among the different financial institutions, and they are described below.

First of all, if you plan to apply for a commercial construction loan, you have to weigh the pros and cons. The first things you need to check are the benefits and the abilities that the financial institution will provide you. Most financial institutions offer loans ranging from $25,000 up to $5,000,000. Are your expectations within those bounds? If not, maybe you should consider getting a commercial renovation loan, ranging from $5,000 up to $50,000. Also, there are always many adjustable rate programs available. Have you considered any of them?

Financial institutions provide a fixed rate for an initial period of time and then lockable interest rates for intervals of a few years (usually one, two, and five years). For the exact value of the initial (as well as the upcoming) rates, usually you have to contact the various financial institutions and then get an offer from each one. Also, the terms of the loan are very different from project to project. In order to get exact values, you should have a very clear vision of what you want to achieve. The experts from the financial institutions will assist you on those subjects. However, don't expect them to build up your plans. You are the first and only one to know what you are trying to achieve.

Like with every loan, commercial construction loans can be both a good and a bad movement in the long run. Before you settle down to a decision, you first have to weigh in all the factors.