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.
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 12 to 36 months, and is settled once a long-term mortgage is in place.