By Drew Smith, Banque Populaire
Rising rent prices, falling inventory and low rates create an opportunity for business owners to consider the benefits of new construction. If your business has expansion plans and your current space is getting too big, you have major leasehold improvements to make to your existing building, or you want a better location for your business, a lender can walk you through the ins and outs. and loan outs and help you achieve the long term security associated with owning your own building.
When it comes to taking out commercial loans, banks look at a multitude of factors, and construction finance is no different. Could new construction be the right decision for your business? Here are a few factors to keep in mind.
A trusted entrepreneur mitigates loan risk. Borrowers often underestimate the importance lenders place on the reputation of the assembled project team. Because of the risk inherent in all construction projects, the more experienced the contractor, the more comfortable the bank will be in assuming the risk. Be prepared to explain how experienced the contractor is with the type of construction project you are proposing, how speculative the project is, if any signed leases are in place, and if the project managers have excess cash and funds. external income to support the project in the event of cost overruns or project delays.
Cash can offset risk. If there are perceived weaknesses in a project, a lender will rely more on other aspects of your loan application. This could include requiring more cash on hand to cover possible contingencies. In general, a lender will want to know how much money the borrower has in the project, as well as the loan amount offered versus the loan to value. The lender will also be interested in the source of repayment of the loan. For example, is it an owner-occupied building for a successful business? Does the reimbursement come from the property itself (via rental income)? Who are the tenants and how are the leases structured? A loan secured by a building with a quality tenant is viewed differently from a tenant who does not offer the same financial strength and stability.
Fixed auctions can help you stay on budget. A fixed offer contract is a contract in which the contractor makes a contractual offer to complete the project for a predetermined price. Assuming there are no change or over-allocation orders, the contractor is required to complete the work for the predetermined dollar amount. If the project costs more than expected (even if it costs more than the initial offer), this charge is borne by the contractor. Banks tend to have a strong preference for fixed offer or “guaranteed maximum price” contracts, as they limit the risk associated with the overall costs of the project.
Be aware of the costs involved. In addition to the price of the land and the costs of construction themselves, business owners should have a solid understanding of other expenses associated with financing construction. For example, interest reserves represent the cost of loan interest during construction of the building. Say, for example, you are building an apartment building. During construction, the building is vacant and does not generate income, but there is always a loan to maintain. It’s a cost of ownership that is often overlooked when budgeting for a new project. Other costs include loan fees, third party financing costs (title, escrow, construction drawings), contingency reserves, permits, and additional incidentals. It’s a good idea to discuss these costs with your lender and make sure you budget the project accordingly.
Whether your business is in need of new industrial warehouse space or you are looking for a busy downtown storefront, this is an exciting time to take advantage of the current market conditions in Island County while helping to the economic vitality of the community. If a new build seems intimidating or more than you’re ready for, remember that it’s never too early to strike up a conversation with a lender about your long-term plans, to see if a new one construction makes sense to you.
Drew Smith is Senior Vice President and Head of Commercial Banking Services in the Commercial Banking Group of People’s Bank Bellingham. For more information, please contact a local lender at our Banque Populaire branches at Coupeville and Port de Chêne.