Construction Loans – Not that Hard!

Every builder wins when they think about getting a construction loan. Well…it doesn’t have to be that way! As a builder, you already know more about your project and what you need than the lender does. You’ve been there, done that. Now, it’s just a matter of zeroing in on a meeting of the minds – if you will.

Obtaining a construction loan is very similar to other commercial loans. In this edition, we will discuss a streamlined process of financing for construction projects that will help you – the builder – understand the steps and what is involved. Once you know the ins and outs, it won’t be so painful!

Below is a list of qualifications for financing a construction loan:

• Experience: The more the merrier! This is especially important when lenders are considering your project. Typically, the least amount of experience acceptable is 3 projects in the last 3 years. However, terms such as rates and leverages (LTV & LTC) will be better with more projects under your belt. The best financing is reserved for the 20+ years of builder experience. These builders have stellar resumes, a website and lots of referrals.
• Liquidity: A minimum of 10% liquidity is the norm. Say you are building an SFR development and the total cost will be $60MM. Lenders will need to see no less than $6MM in reserves. This is extremely important! I have discussed many loan scenarios with borrowers and this is one area that seems to be overlooked.
• Networth: Experienced builders should already have a Personal Financial Statement (PFS) on hand and ready to submit to lenders. This is basically an itemized statement of assets such as REO, Stocks, Checking & Savings accounts as well as liabilities. It’s actually a Balance Sheet that summarizes assets vs. liabilities. A must have!
• Resume: With a minimum requirement of 3 projects within the last 3 years, a prospective borrower will need a good resume that outlines their projects such as location of the project, cost, details and outcome.
• Proforma: Right up there with the PFS! A builder should have this drawn up by one of the many construction analyst firms available. I can’t stress enough the importance of this report. This is your selling and marketing piece for the project. Let’s assume that you are developing a Mixed-Use property (These are very popular, by the way). The Proforma, which is usually in a spreadsheet format, details costs, demographics, city/county market analysis, square footage and the potential to rent or sell with current market conditions.

Here is an example of a Proforma:

• LLC: You will want to put the project into an LLC to protect yourself as well as the lender. Also, unbeknownst to many borrowers, Non-Recourse terms are available on construction loans for experienced borrowers. You should be building in a desirable location (MSA) and have a strong PFS. If you’re not familiar with the term, it simply means that if your project fails, the lender will not come after your assets, but rather the assets of the project. Meaning, whatever has been accomplished at the point of default. This could be the land, equipment and the buildings currently in place.

Now let’s talk about the required steps and documents that need to be in place before approaching a lender. Some of the first questions you will get is, “Do you own the land?” “When did you acquire it?” “What did you pay for the land?” (Skin in the game) Perhaps it goes without saying, but the lender will also want to know if the land is “shovel ready.” Shovel Ready land means utilities, paving, zoning, water & sewer…just to name a few, have been completed.

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In addition, certain documents and processes will be required from the lender before underwriting can begin.

The below list will save you a lot of heartache in the lending process:

1. Passport – If Foreign Investor

2. EIN Documentation

3. Article of Organization

4. Entity Organization Chart

5. Executed Operating Agreement of the borrower and any entity owners

6. Appraisal.

7. Cost Breakdown

8. Architectural Drawings (Civil, Architectural, Structural, MEP) and site plan

9. Geotech Report

10. Construction Schedule

11. Permits

12. Borrower bank information for draw deposit.

13. Artistic Renderings

14. GC Agreement

15. Contractor Portfolio – Evidence of similar product

16. Financial Statements of the Borrower.

17. Developer Experience Summary

18. Executive Summary of Project

19. Use of Funds

20. Payoff Statement

21. TITLE Preliminary Report

22. Entitlement Documentation: Initial study, Neg. Dec., Environmental impact

23. PFS of All Principals & Partners – Preferably CPA Audited

I know it’s a lot of information! Once these preliminary steps are accomplished, it makes getting the loan easier, trust me. You will feel much more confident and prepared when it’s time to go to the Negotiation Table.

In my next edition, I will go over the different construction loans available as well as expectations for closing and the like. For any questions or comments, visit &

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